The Canadian dollar looks set for a sustained second wind

Elevated prices for raw materials and accommodative policies have buttressed the reflation trade
Newsfeed27 Jul 2021
Photo credit: AFP Photo

The Canadian dollar, one of the best-performing major currencies this year, may be poised to get a sustained second wind.

That is in large part because many of the fundamentals – elevated prices for raw materials and accommodative central bank policies – that have buttressed the reflation trade this year remain intact even as jitters and stretched positioning have prompted some to pull back a bit from the currency. Many of these same dynamics are also undermining the yen, a key counterpart for the trade.

The loonie suffered setbacks over the past month as asset managers scaled back long reflation bets amid concern over surging virus cases from the delta variant. But speculators remained sanguine on the outlook, with leveraged funds increasing their holdings in the second week of July, data from the US Commodity Futures Trading Commission (CFTC) show.

Commodity prices, after withstanding sharp setbacks over the past month, climbed to a fresh six-year high on Monday (26 July). The Canadian dollar’s sharp downturn in the past month, along with other resource-linked currencies, suggests upside potential in a return to the long-term trend.

CFTC data suggests speculative yen shorts may start fearing losses dollar-yen drops below 107 in the spot market, a level Japanese corporates are also sensitive to. Canadian dollar longs are watching CAD1.28 per greenback, a pivot point reached in December when positioning flipped bullish the loonie. Combining these levels for the loonie-yen pair equates to a cross rate of JPY83.50 per Canadian dollar, about 5% below the current level of 88.

The loonie strengthened 0.2% to CAD1.25 per dollar on Monday, while the yen strengthened 0.14% to 110.39 per dollar. – Bloomberg News.

The US Dollar Index fell 0.28% to 92.649, the euro gained 0.27% to USD1.1803, and the pound rose 0.51% to USD1.3818.

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