Canadian Dollar: Weak fundamentals cap gains against US Dollar - BNY

BNY’s Geoff Yu notes that Canadian Dollar (CAD) positioning remains weak ahead of the Bank of Canada (BoC) decision, with USD/CAD dominating flows and cross-currency activity surprisingly limited. The report highlights that recent CAD inflows were mainly mean reversion, while fundamentals offer little support. Despite trade tensions with the United States (US) and BoC lagging G10 peers on hikes, positioning suggests scope for further USD/CAD-driven mean reversion.

USD/CAD flows dominate CAD dynamics

"CAD interest remains light ahead of today’s BoC meeting. Selling resumed after the July decision, and efforts at an offset have been tame. Early August inflows appeared to be a case of mean reversion for July, while the rest of the month was largely flat."

"Some light interest is re-emerging ahead of the decision, but there is no conviction behind it. The only potential source of support is that a two-month rolling average of -0.29 in scored flow is very weak by G10 standards, providing strong scope for mean reversion opportunities."

"Crucially, there is no sign of damage from the escalating trade dispute with the U.S. Neither is there an impact from the BoC’s inability to hike rates while many G10 peers are moving in the opposite direction. This underscores the strength of weak positioning, leading to mean reversion."

"USD/CAD is fully driving CAD flow. This also shows that there is very limited activity in CAD on the crosses, which is a surprise."

"The challenge is now for USD/CAD to find selling interest based on CAD fundamentals, which are lacking for now."