BNY’s Head of Markets Macro Strategy Bob Savage highlights that the Canadian Dollar (CAD) has been among the best-performing G10 currencies over the past two weeks, helped by steady inflows during the Iran conflict. However, he notes investors are cautious into the upcoming Bank of Canada (BoC) decision, with USD/CAD selling dominating and little evidence that CAD is being favored versus higher-yielding G10 or Emerging Markets (EM) currencies as a true haven.

Strong run but haven status questioned

"CAD has been one of the best-performing G10 currencies in the past two weeks, over the period of the Iran conflict. Toward end-February, there were already signs of a turnaround taking place, as CAD saw some good inbound flows, possibly related to rebalancing. Over the past two weeks, however, interest has been very consistent and the currency is amid its best run of the last two months."

"At a +0.07 YTD flow average, the currency has a comfortable buffer in place, although there is a sense that markets are trying to avoid excessive exposure heading into the BoC decision. USD/CAD selling is currently severely outpacing CAD purchases, supporting the view that aside from hedging on the pair (or Canadian investors adding to hedges on their USD-denominated assets), there is very little interest in CAD on a relative-value basis."

"If anything, it would require significant selling of CAD on the crosses to bring the CAD aggregate inflow average down to +0.07 from 0.18 for CAD vs. USD. CAD versus higher-yielding G10 and EM currencies appears to be a carry trade, especially if the currency is seen as relatively liquid and easier to manage for relative-value participants in FX markets."

"As such, the fact that CAD is not being favored over AUD, GBP or EM names would cast doubt on its status as a solid haven during times of stress, even if there is an energy angle in play."

"The BoJ and BoC will both be watched for FX market reactions and the tone that central bankers strike in their forward policy guidance as they balance risks."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)