INSTITUTIONAL TRADE: Long USDCAD – MORGAN STANLEY
Morgan Stanley recommends a buy in USDCAD.
Rationale:
We think global reflation is largely in the price, leaving limited room for global growth to surprise to the upside.
US growth outperformance relative to Canadian growth (and higher US real yields) are consistent with USD/CAD gains. We think oil prices will struggle to rally above $70bbl, weighing on CAD, and investors are currently positioned short USD/CAD.
Key catalysts:
The BoC’s taper pace and output gap projection, oil prices, US Fed policy guidance. Over the next few months, we expect CAD to soften as the recent acceleration in global growth hits a slower inflection point, domestic growth meets (but does not exceed) market expectations and US real yields rise as a Fed taper approaches.
We think Brent is unlikely to rise above $70bbl in the near term, 2y yield differentials no longer exert downward pressure on USD/CAD, and investors are already positioned for CAD strength.
Positioning:
Investors maintained long USD/CAD positions for much of 2020 despite the grind lower in the pair. However, following CAD outperformance year-to date in 2021, CFTC data suggest that investor positioning has now flipped to being most long CAD among all G10 currencies.
That switch reflects two changes: a rise in long CAD positions among asset managers to decade highs, and a paring back of leveraged funds short CAD positions. Long CAD positions, therefore, mostly reflects net positioning among long-term investors.
While long CAD positioning mostly reflects wagers made by long-term investors, backtesting reveals that both leveraged fund and asset manager positioning have historically been contrarian indicators, rather than momentum indicators. A contrarian indicator means that long positioning means poor forward returns, and vice versa.
A similar picture emerges in other positioning data. A key trader survey (the daily sentiment index) indicates that investors are bullish CAD. While this survey has historically been a momentum indicator when investors are extremely bearish on CAD (i.e., bullish USD/CAD), it can be a contrarian indicator when investors are extremely bullish on CAD (i.e., bearish USD/CAD).
Risks:
The risk is that the USD continues to broadly depreciate amid lower US real yields and wider breakevens, which would likely push USD/CAD below 1.20 to a meaningful degree.
Rationale:
We think global reflation is largely in the price, leaving limited room for global growth to surprise to the upside.
US growth outperformance relative to Canadian growth (and higher US real yields) are consistent with USD/CAD gains. We think oil prices will struggle to rally above $70bbl, weighing on CAD, and investors are currently positioned short USD/CAD.
Key catalysts:
The BoC’s taper pace and output gap projection, oil prices, US Fed policy guidance. Over the next few months, we expect CAD to soften as the recent acceleration in global growth hits a slower inflection point, domestic growth meets (but does not exceed) market expectations and US real yields rise as a Fed taper approaches.
We think Brent is unlikely to rise above $70bbl in the near term, 2y yield differentials no longer exert downward pressure on USD/CAD, and investors are already positioned for CAD strength.
Positioning:
Investors maintained long USD/CAD positions for much of 2020 despite the grind lower in the pair. However, following CAD outperformance year-to date in 2021, CFTC data suggest that investor positioning has now flipped to being most long CAD among all G10 currencies.
That switch reflects two changes: a rise in long CAD positions among asset managers to decade highs, and a paring back of leveraged funds short CAD positions. Long CAD positions, therefore, mostly reflects net positioning among long-term investors.
While long CAD positioning mostly reflects wagers made by long-term investors, backtesting reveals that both leveraged fund and asset manager positioning have historically been contrarian indicators, rather than momentum indicators. A contrarian indicator means that long positioning means poor forward returns, and vice versa.
A similar picture emerges in other positioning data. A key trader survey (the daily sentiment index) indicates that investors are bullish CAD. While this survey has historically been a momentum indicator when investors are extremely bearish on CAD (i.e., bullish USD/CAD), it can be a contrarian indicator when investors are extremely bullish on CAD (i.e., bearish USD/CAD).
Risks:
The risk is that the USD continues to broadly depreciate amid lower US real yields and wider breakevens, which would likely push USD/CAD below 1.20 to a meaningful degree.