TD Securities highlights that the Canadian Dollar (CAD) is increasingly positioned to become a prominent global carry funding currency, with its carry/volatility profile now comparable to the Japanese Yen (JPY) [1]. The report notes that following the introduction of new United States (US) tariffs, USD/CAD has rallied to reach TD Securities' year-end forecast of 1.39, and the firm anticipates further upside for the pair relative to short-term fair value [1].
The analysis points out that the FX market, after the July JPY intervention, has been considering alternatives such as the Swiss Franc (CHF) for carry funding, but current market conditions suggest the CAD may take on a more significant role [1]. TD Securities argues that, unlike the JPY, which could see bullish catalysts from the upcoming Bank of Japan (BoJ) meeting, the CAD is likely to face additional bearish catalysts in the near term. These include the negative impacts of the latest tariff shock on market sentiment and domestic production, as well as a fading of the Bank of Canada's (BoC) recent hawkish narrative from the September meeting [1].
The report specifically references the Section 338 tariffs dispute with the US as a key driver of recent CAD weakness and suggests that as the effects of these tariffs are reflected in economic data, the CAD could experience further downside pressure [1].
CONCLUSION
TD Securities sees the Canadian Dollar's role as a global funding currency strengthening due to recent US tariffs and shifting market dynamics. The firm expects further CAD weakness as tariff impacts materialize and the market discounts the BoC's hawkish stance. Investors should monitor upcoming economic data for additional bearish catalysts.