Forex Flash: CAD still holds many benefits – UBS

Despite the perception that massive selling has taken place in the wake of the 'AAA unwind', on a structural level the market is still heavily long CAD. There was a major round of accumulation in mid-2012 (riding the coattails of the SNB), which is currently in the process of being reduced. According to Research Analyst Gareth Berry at UBS, “Positioning shifts have been quite consistent with changes in the CAD's NEER and momentum is clearly towards the downside.”

Although many of the flows may have been more in favor of the EUR rather the USD, the perception that the CAD-related carry will only deteriorate from current levels could lengthen the process and would probably serve as the biggest catalyst for further CAD selling, while some qualitative changes in fundamentals will simply be the ex-post justification for price action.

As price action in CHF, JPY, NOK and the EUR have shown: positioning liquidation coupled with policy reassessment is hard for markets to counter so we would let downside run for now, and the USD/CAD at 1.0500 is certainly achievable as weaker growth and the effects of rebalance are fully-, even over-priced in. Ultimately though, it is important not to overplay the negativity. On a relative basis, Canada is certainly losing its shine, but in absolute terms - from being the most liquid AAA, to having a solid commodity complex, not to mention favorable demographics – the currency still has a lot going for it.