I have to think the Canadian dollar is one of the better currencies out there. Yes Canada is having its share of problems with the down turn in its economy. However, its fiscal policies are sound and as well their banks are in much better shape.
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The Canadian dollar has been among the weakest currencies in the past two weeks and the downturn has run too far, according to Citigroup currency strategist Todd Elmer.
“CAD weakness has overshot fundamentals. With USD broadly trading towards the top of recent ranges we believe there is a tactical opportunity to sell USD/CAD,” he said in a note to clients.
Mr. Elmer said both the fiscal and financial sector strength in Canada provide a strong foundation even as the Bank of Canada moves toward quantitative easing. He added that a base for commodity prices and stabilization in the flow of economic data could act as an immediate catalyst for the loonie’s appreciation.
“Canada benefits from one of the strongest financial sectors in the world and is better positioned fiscally than many of its peers. While Canada is set to run deficits for the first time in a decade, it still ranks close to the top by our gauge of fiscal resilience.”
He added that weakness for the Canadian dollar is likely a knee-jerk reaction to the Bank of Canada’s hint regarding quantitative easing, while investors may have entered into long U.S. dollar positions amid the decline in risk appetite.
However, Mr. Elmer does not think a sell-off for the loonie can be sustained on the basis of the Bank of Canada’s actions alone. Citigroup’s indicator shows that investors unwound peak Canadian dollar long exposure over the course of the past two years.
“Entering 2009, positioning was close to flat, suggesting there is now limited scope for a flush-out of CAD longs,” he said. “With investors still seeking to preserve capital, a sharp build-up in CAD shorts looks unlikely.
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