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The Canadian dollar dip was a shallow one, and that’s telling

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Can’t keep the loonie down

Can't keep the loonie down

USD/CAD is near the best levels of the day, down 67 pips to 1.2094.

Today’s drop completely erases the gain yesterday. What’s interesting is that oil’s rebound today only covers about two-thirds of yesterday’s loss. Copper (which has a tight correlation with CAD lately) has also barely budged and lumber is down for the fourth day.

It all suggests stronger underlying demand for the loonie. Yesterday BOC Governor Macklem attempted some light jawboning but with limited tools available, he doesn’t have any firepower so the comments landed flat. Moreover, with the rise in US inflation expectations today boosting the odds of rate hikes everywhere, it’s Canada that’s most-likely to go first.

I would have expected to see a bigger bounce in USD/CAD given how quick the move from 1.26 has gone. It’s not happening though, and maybe that’s the tell. There’s some real disbelief in CAD and that’s the best setup for an extended run. If you like commodities, reflation and believe this is the start of a prosperous economic cycle, then there aren’t many places to be better than CAD.

Bank of America is out with a note on the loonie today and said the trade is to continue to buy the dips in the best-performing G10 currency this year.

“CAD’s outperformance is consistent with our directional views,
albeit considerably larger in magnitude than we expected. Not only did
CAD outperform in 1Q while the broader US dollar was rising (one of
three currencies marginally stronger against USD over the period), but
also managed to keep pace with peers over Apr-May when the broader USD
retreated,” BofA wrote.

“Looking forward, we expect CAD to continue to trade with
commodity proxy status, which presents both upside and downside risks.
For now, we remain a CAD buyer on dips this year but see present levels
as overdone.”

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