As investors continue to look for alternatives to U.S. assets amid heightened uncertainty due to U.S. President Donald Trump’s ongoing trade war, the Canadian dollar is gaining against its American counterpart.
That’s largely due to global investor sentiment shifting towards increased diversification, according to Jeremy Stretch, chief international strategist at CIBC Capital Markets.
“In a sense the diversification narrative is playing negatively in terms of the U.S. and looking certainly far more positive in terms of other asset markets,” he told BNN Bloomberg in a Thursday interview.
“So, we’re tending to find that looking at the asset market performance, whether it be the equity market or elsewhere, is providing a more constructive bias for currencies such as the Canadian dollar and that’s been one of the reasons why we have witnessed this rebound.”
The loonie was trading at 73 cents US on Thursday afternoon, its highest level against the greenback since October.
Stretch noted that many of his clients, particularly institutional investors, are reevaluating their reserve holdings given the uncertain environment in the U.S., and alternative jurisdictions like Canada are seeing an influx of investor interest.
“There is that appetite to look at alternative markets, look at alternative investment destinations where there is good governance, where there are stable political dynamics and obviously the election in a sense has removed one of those uncertainties from the Canadian dynamic,” he said.
“As well as a reasonably stable or constructive fiscal backdrop relative to elsewhere, so that does provide appetite and interest in terms of Canadian products and if you look at some of those trends in terms of overseas purchases of Canadian fixed-income paper, those are reasonably positive.”
Stretch said momentum for the loonie may keep rolling on in the weeks and months ahead, though it will depend heavily on upcoming economic data releases in Canada and the U.S., as well as the next Bank of Canada interest rate decision.
“That might be one of the factors which could temper a little bit of enthusiasm,” he said, “but ultimately it’s that dollar diversification story which seems to be the preeminent one.”
