Our view:
- Recent one-way flow on CAD presents risks for a reversal. Our flow data shows consistent and heavy CAD buying from the leveraged sector in recent weeks, with the currency benefitting from consolidation in USD. Indeed, CAD buying ran ahead of overall USD selling, with the latter only starting to catch-up recently. This may skew risk-return for CAD, since increasingly long positioning could be a limiting factor for buying, while there will be vulnerability for a reversal upon a either a risk-on or risk-off USD turnaround.
- In a risk-off USD rally, USDCAD could benefit from short-covering. We would not rule out this scenario given the ongoing negotiations on Greece. Sentiment has thus far been resilient, but with many investors already going through a period of poor returns, it may not take much to trigger risk-reduction. Any decline in oil prices in line with deteriorating sentiment could likewise undercut CAD.
- CAD has benefitted from relatively strong data flow and a degree of BoC hawkishness, but with USDCAD trading somewhat lower than might be anticipated on the basis of its previous relationship with relative interest rate spreads, there may be acute vulnerability to more positive news flow from the US. Durable goods is the next major data release in the US. While this data point is not always a major market mover, there could be more sensitivity on strength given Fed emphasis on data dependency and earlier weakness in this sector. A reversal would point to an increased breadth of pick-up in the US economy.
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