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The Canadian dollar continued gaining ground and this is far more than a correction from the 11 year lows it reached against the greenback beforehand.

Yet  despite the break under the double bottom of 1.29 for USD/CAD, the team at Credit Suisse sees three reasons for shorting the C$ with a clear upside target for USD/CAD:

Here is their view, courtesy of eFXnews:

The Canadian dollar has rallied sharply in the past two weeks, after peaking out in late September.

While this performance is partially attributable to the broad rally in risk assets, it is also the product of the emergence of Canada-specific supportive factors.

For the time being, we don’t think these risks are compelling enough to warrant a change in view on CAD. We remain bearish, and project CAD at 1.34 in 3 months and 1.38 in 12 months,” projects Credit Suisse.

In particular, CS outlines 3 reasons for staying bearish:

1) Competitiveness gains are heavily dependent on CAD weakness.  

“The improvement in non-energy export momentum highlighted above suggests Canada’s manufacturing sector is starting to re-gain competitiveness. A return to a commodities/manufacturing balance of the pre oil boom days however is also consistent with a much tighter interaction between export momentum and FX. As such, we see a risk that further loonie strength could cause a shift in the BoC’s policy outlook. The pickup in core inflation has been another reason behind the drop in BoC easing expectations. As with the export strength story above, this data development likely is at least in part a consequence of the sharp deterioration in CAD. An extension of the current trend of FX strength would likely weigh on core CPI, arguing in favor less sanguine policy expectations,”CS argues.

CAD non export performance had stronger link before 2008

2) Risks associated with the housing sector continue to rise.

The housing sector has experienced sharp expansion in 2015. Housing starts are back to levels last seen in 2011, before the BoC tightened loan-to-value requirements. This development remains a key risk to Canadian financial stability in our view. It has also been mentioned in financial media as a factor swaying policy expectations away from further easing.  Governor Poloz himself however has discredited this interpretation of the rise in housing activity in a speech on 12 October 2015 on the topic of financial stability,” CS adds.

3) The flow picture remains unsupportive.

“The BOP picture has not evolved in a supportive direction in recent months. In particular, we note that the YTD M&A announcement balance remains the most negative in G10 both in GDP-scaled terms. Divestiture in the energy sector has dominated the trend on this front. The portfolio balance has not seen much repercussions on this front, for the time being. However, with foreign investors owning more than 50% of the outstanding stock of high yield issues by Canadian energy companies, we think funding pressures and stagnant oil prices could result in further outflows from the Canadian fixed income market,” CS notes.

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