CAD Poised to Gain Prominence as Global Carry Funding Currency

TD Securities believes that the Canadian Dollar (CAD) will gain prominence as a global carry funding currency, thanks in part to its comparable carry/vol profile with the Japanese Yen (JPY). This shift is attributed to the recent tariff shock, which has led to a rally in USD/CAD. The Canadian Dollar's role as a funding currency could be bolstered by its ability to offer a competitive yield compared to other major currencies.

The TD Securities report notes that the CAD's carry/vol ratio profile is already comparable to the JPY. This means that investors may see the CAD as a viable alternative for carry trades, where they borrow funds in one currency and invest them in another with a higher return. The report also suggests that the Canadian Dollar has more room to rise versus short-term fair value, despite having already reached the year-end forecast of 1.39.

The report cautions that the CAD will likely see more bearish catalysts in the near-term as the impacts of the latest tariffs shock on sentiment and production feeds into domestic economic data. This could lead to a fade in the hawkish Bank of Canada (BoC) narrative from the September meeting, which may weigh on the Canadian Dollar's performance.