Morgan Stanley’s Yilin Nie is leaning into the long-Canadian dollar trade. The argument is that a strong Canadian PMI will push relative GDP growth vs. the U.S. in Canada’s favour over in the near-term. At the same time, Canada’s interest-hike cycle is likely to outpace America’s given that the U.S. Federal Reserve seems consigned to near-zero interest rates for at least another year.
Ahead of the BoC rate decision, we had initiated a short USD/CAD position (26 August 2010). This trade has moved 2.4% in our favour, and we believe there is still downside. Rate and growth differentials are moving more in favour of Canada. With the Fed firmly on hold and considering more easing, the BoC’s gradual policy normalization should continue to underpin the currency. Our economic forecasts also show slightly higher growth in Canada versus the US in coming quarters. These factors should underpin CAD’s positive momentum. We target parity for the pair.
Note however, that their bullish Canadian dollar view is essentially playing into the current trend. The loonie has been strengthening for some time now.