Canadian Dollar buying could fuel a rebound against the US Dollar, but JPMorgan’s trading desk doubts the recovery has lasting economic support.
JPMorgan’s trading desk has spotted a shift towards Canadian Dollar buying, but remains unconvinced that a rebound would develop into sustained strength against the US Dollar.
Its 6 October commentary describes clients selling USD/CAD across all customer categories, a change from the persistent selling of the Canadian currency seen recently.
By Wednesday afternoon, however, USD/CAD had risen to 1.4259, reversing most of Tuesday’s decline and leaving the Loonie’s recovery looking fragile.
The desk writes: “While positioning has become increasingly stretched and leaves room for a squeeze lower in USDCAD, I still struggle to find a compelling fundamental catalyst for sustained CAD outperformance.”
When investors have accumulated bets against the Canadian Dollar, even a modest improvement in sentiment can prompt them to buy it back to close those positions.
That buying can push USD/CAD lower without a corresponding improvement in Canada’s growth prospects or expected investment returns.
The breadth of the change across JPMorgan’s clients makes it worth watching, although these are the desk’s own flows rather than evidence that the whole market has changed direction.
Oil price support is beginning to fade
JPMorgan writes: “With oil gradually pulling back from its highs and traffic through the Middle East normalising somewhat, some of the recent support for the loonie is starting to fade.”
For an energy exporter such as Canada, higher oil prices can improve export revenues and support the currency.
An easing of the supply disruption can therefore have mixed consequences for the Loonie, helping global confidence while reducing the energy-price advantage enjoyed by Canadian producers.
The desk consequently still sees USD/CAD risks tilted upwards, even while allowing for a temporary fall as crowded positions unwind.
That caution offers a nearer-term counterpoint to the sustained recovery envisaged in our coverage of Crédit Agricole’s Canadian Dollar outlook, where eventual relief from US rates supports the currency further ahead.
Canada’s recovery still needs to withstand trade pressures
In its September policy decision, the Bank of Canada described a broadening economic recovery, with stronger consumption and gains in exports and business investment.
But it also warned that new US tariffs and threats of further action put the sustainability of that recovery at risk, while subdued labour demand pointed to spare capacity in the economy.
The central bank held its policy rate at 2.25%, balancing a more uncertain growth outlook against the danger that elevated energy costs would spread into other prices.
For the currency, stronger Canadian activity would offer a firmer basis for fresh investment than the closing of existing bearish bets.
The Bank of Canada’s next decision and updated economic projections on 28 October will assess whether the rebound is holding up as those trade risks feed through.
Our currency coverage draws on live market data, official economic releases and published bank research.
