By Dean Popplewell
The currency, unlike similar interest rate and risk sensitive currencies, does have a genuine split personality. Many see the Canadian Dollar as a “safe haven” in times of global uncertainty, while others see it as a “risk sensitive” bet that underperforms when its sister asset classes, commodities and equities, are abandoned by investors.
In the past 18-months, the currency has managed to attract foreign buying interest from an array of interested parties, ranging from portfolio funds to reserve currency management specialists, who prefer to diversify out of the “the big dollar” and the EUR because of the country’s triple AAA rating, sound economic fundamentals and stable financial system.
It also helps to have a CBank governor, who for now, seems to be towing the “hawkish” party line. A tune that many observers believe that Governor Carney will have to change now that both the ECB and the Fed look to provide further easing measures maybe as early as this month.
These are all sound enough reasons for individual investors to renew their own speculative interest to wanting to own the currency in their own right. But, is it truly a safe haven play?
The diversification flows into the CAD certainly give the perception that the currency is a less risky play than some of the other traditional safe havens currencies like the CHF or JPY. The loonie has acquired the description of a second tier reserve play, mostly because of reserve CBank managers having to use it increasingly as a diversification play out of the USD and EUR. Certainly the role of the SNB keeping the CHF pegged to the EUR and BoJ’s increasing threats of direct market intervention for its own currency, the JPY, has made it an easier choice for investors to seek out an alternative refuge.
The SNB has been selling EUR’s against other currencies, like the CAD and/or AUD to diversify and spread its own risk. As a top tier safe haven, both the CHF and JPY are momentarily somewhat unattractive. The CHF carry negative yields and the Yen is less desirable ever since the BoJ has stepped up its bond-buying program in recent months.
However, the loonie’s strong tendency to move in tandem with equities indicates that it remains a risk sensitive or “high beta” currency rather than a true safe haven. Perhaps we can stick to calling it s a second tier reserve?
Be aware that the currency outright is too highly correlated to commodity prices to be considered a “natural safe haven,” but a safe haven nonetheless when conditions are applied.
Large and Liquid
Ideally, currencies have to be supported by “large and liquid financial markets to at least be considered as a genuine safe haven. Despite the Canadian financial markets being much smaller than say the USD or JPY, the domestic market has not been small enough to dissuade foreign investors. It may be considered a limiting factor, but you only have to recount current euro market interest in SEK and NOK outright. Both of these currencies attract safe-haven flows, despite the countries much smaller markets.
According to Moody’s, Canada stands out among some of its triple-A rated European peers and the currency is seen more as a safe haven right now. Canada’s safe haven status is constantly underscored by the high foreign demand for the country’s Government, provincial and municipal debt. The on going strength of the loonie, despite the current account deficit, indicates “that the demand for Canadian assets have been strong.”
Obvious external risks to Canada’s outlook depend on its southern neighbour, the U.S.’ growth prospects, the eurozone crisis and the on going soft-landing debate in China. Internally, both economists and rating agencies believe that the downside risk of national house prices and household debt are “all manageable” domestic concerns and something that would not be in danger of damaging the Canadian Government Bond rating.
Describing the loonie has a safe haven destination may be as simple as stating that the market has eventually run out of currencies on which to place bets. The “natural” safe haven plays this year comes with a risk warning and certainly many of the original go to currencies do not have the same attributes mostly desired by a these specialised currencies as outlined above. The CAD in itself does not have these natural tendencies, but when comparing to the dynamics of other economies, the market is still forecasting +2.1% growth for Canada this year and slightly higher for next.
The 10- and 30-DMA are negatively aligned, adding to the overall bearish structure of USD/CAD outright. Even the daily momentum remains bearish, though only marginally. In this tightly confined trading range the market continues to be a better sellers of dollars on rallies, preferable north of 0.99 cents, with a short term target of 0.98 where many in the market hope to take profit and double up and go long for another attempt above parity. However, the retail sector continues to want to own dollars outright and currently remain +78.4% long the “big” dollar.