Time to sell Canadian dollar say Morgan Stanley
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Latest client report from the US investment house 10 May 2016
Courtesy of our friends at efxnews.com. Click here for a free trial.
"We now believe it is time again to short CAD as we expect the market to price a higher probability of a BoC cut this year.
Canada has reported two weak trade reports in a row, seeing its deficit reaching CAD3.4bln. Falling exports into the US were the main reason for the deterioration of Canada trade. There are two reasons for this development.
First, Canada has played its non-energy competitiveness away by allowing wages to exceed productivity gains for too long. It has caught the symptoms of Dutch Disease, which now become visible as it saw a 15% decline of its terms of trade from 2011 levels.
Second, the US reporting record-high oil inventories leaves little room for Canada to increase its energy supply into the US.The weakening trade balance is likely to push the current account deficit to 4%, which would be the second-highest among the G-10 following the UK's 7% deficit. Current account deficits become a problem for currencies when global liquidity conditions weaken.
CAD and GBP risk sensitivity is set to increase from here, we think"
They also think the USDJPY rally may be getting a little overdone:
"USDJPY has entered an upward correction, as Japan's financial institutions increase their post Golden Week' seasonal bid for foreign bonds.
However, high P&L volatility of external holdings suggests institutions increasing their hedging ratios, suggesting the current rally running out of steam between the 108.65/109.43 retracement level"
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