USD/CAD struggling to rally but is this an opportunity to get long? – RBC CM

Research Team at RBC Capital Markets, suggests that the USD/CAD was, and still is, one of the pairs RBC expects to gain substantially on a Trump presidency.

Key Quotes

“But having peaked just shy of 1.36 in the days after the election, CAD is now outperforming on most crosses. We can put this down to at least four factors: (1) a perception that CAD will benefit from higher US growth/US fiscal expansion; (2) an expectation that Keystone XL will be approved by the new President/Congress; (3) a traditional relationship whereby CAD-crosses tend to outperform on USD strength; and (4) a steepening in Canada’s forward curve that is just over half as much as the steepening in the US (2yr swaps +9bps in CA vs. +17bps in the US since election day close).” 

“While we would agree with the expectations for Keystone XL, we doubt that CAD will be a net beneficiary overall. Although US growth has in the past benefited Canada through its very strong trade links, those have weakened over time. In recent years, the BoC has been consistently disappointed by Canada’s export performance, in part because it has failed to match up to projections based on US growth. This is partly down to the falling share of non-commodity exports in overall trade to the US. Trump’s protectionist rhetoric has not been directed at Canada, but we still think Canada would be a relative loser if US protectionism rises (see Total FX, 11 August 2016). Finally, note that around half of Canada’s exports come from foreign majority owned firms (primarily the US). If US political sentiment becomes increasingly negative toward offshoring production, it would be hard for Canada to avoid the crosshairs. That could weigh on new investment by foreign majority-owned exporters to build capacity—a key component of the BoC’s long-awaited rotation story.”