The stronger Canadian dollar doesn’t reflect a rosier view of the economy, and underrates the downside of further trade turmoil, according to Desjardins Group.
In a new report, the firm’s economists said that the strengthening of the loonie against the U.S. dollar over the past few months, isn’t the result of growing confidence in the economic outlook, and is more driven by flows — including a rotation out U.S. tech stocks and into Canadian equities, increased currency hedges by Canadian pension funds and shifting speculative positions.
“Ultimately, the Canadian dollar’s recent resilience appears to be a byproduct of positioning, hedging activity and equity flow rotation rather than a meaningful reassessment of Canada’s macro fundamentals,” it said.
At the same time, currency markets appear to be underrating the risk of a negative outcome from the CUSMA trade deal review, it said.
“Markets are not pricing in meaningful risk premia for a ‘no‑deal’ outcome — one that could lead to sharply higher tariffs on Canadian exports,” it said.
“With options markets signalling calm, implied volatility subdued and traders leaning into further [U.S. dollar] weakness, the pricing backdrop looks complacent relative to the stakes of the upcoming CUSMA review. For investors with Canadian exposure, this is an opportunity to hedge tail risks,” it said.