According to BNY’s Geoff Yu, the selling of Canadian Dollar (CAD) accounts has eased ahead of the Bank of Canada (BoC) meeting, which has allowed for light aggregate CAD purchases after a prolonged period of pressure [1]. Yu notes that the improvement in CAD flows is primarily driven by USD/CAD selling from CAD-based investors, indicating that these investors are no longer adding to their USD exposure following significant inflows in late June [1].
Despite this tentative improvement, Yu cautions that domestic selling and weak Canadian asset flows continue to cap the upside for the CAD, suggesting that only selective CAD exposure is warranted at this time [1]. He highlights that the two-month rolling flow average for CAD remains extremely weak at close to -1.5, a level typically associated with severe risk aversion [1].
Yu also points out that while higher energy prices may provide marginal support, CAD and Canadian equity flows do not closely track crude price movements [1]. He emphasizes that BoC policy pricing will remain a key factor influencing CAD performance, but current flows and asset holdings appear to better reflect the policy backdrop, potentially creating room for value to emerge [1].
Looking forward, Yu suggests that if the negative news is already priced in and onshore investors begin to hedge overseas assets, there could be potential for a more meaningful reversal in CAD flows [1]. However, he reiterates that any increase in CAD exposure should be selective rather than aggressive due to ongoing domestic and asset flow weaknesses [1].
CONCLUSION
The Canadian Dollar has seen a tentative improvement in flows ahead of the Bank of Canada decision, driven by reduced selling and selective purchases. However, persistent domestic selling and weak asset flows continue to limit upside, and analysts recommend a cautious approach to CAD exposure. Market participants are watching for signs of a more durable reversal, but current sentiment remains restrained.