[Calxy]

CAD has not yet shed the shackles of being almost exclusively driven by sentiment swings and the hesitation in the outperformance of global financial
stocks is casting doubt over the sustainability of the recent CAD rally. With uncertainty regarding the pace of the global economic recovery still prevalent, the “world of one trade”, guided by sentiment swings, refuses to disappear. Consequently, CAD’s July outperformance might be running out of steam even though the Bank of Canada inadvertently removed a potential obstacle to future CAD rallies. The dominance of the “one trade” phenomenon might still blindside CAD bulls in the not too distant future if renewed uncertainties about the pace and
sustainability of the global recovery re-emerge.

During the last few months a strong consensus view amongst economists and central bankers has emerged: the eye of the global financial storm has passed. On the back of this unfolding wisdom riskier assets got mopped up by investors,
resulting in strong equity, commodity and commodity currency rallies. Increasing risky asset prices, including base metal and oil prices, seemingly justified CAD’s recent rally and partially explained the BoC’s more sanguine approach to the most recent CAD rally.

However, the fact that the “world of one trade” is again strengthening rather than weakening is disturbing. That is to say, the co-movements between riskier assets classes against safe haven assets are again tightening (equities, commodities and commodity currencies vs US Treasuries, JPY, CHF and USD).

For the time being CAD remains at the mercy of sentiment until a more certain global economic recovery path emerges. Renewed worries about the pace and sustainability of the global recovery could undermine the current CAD rally as investors partially retreat from equities to reflect a less robust recovery path.