Net foreign inflows likely to drive sustainable loonie gains, ATM calls lure

Canada's considerable trade deficit is a persistent issue that has popped up our bearish sentiments on CAD ever since the imbalance became decreasingly funded by "long-term" capital flow.

But from last quarter as shown in the diagram the vested interested in bond investments are seen.

• Demand for loonie bonds surges: Net foreign buying of Canadian bonds jumped in Q1 to levels last seen during the "risk-on/risk-off".
  
  
• Process of bond issuance in a lofty pace: It is observed that the total new issues net of retirement schemes are spiked up close to CAD 20 bln.
  
  
• High demand for Canadian bonds bearing coupons in foreign currency: Net foreign cash inflows in Canadian debt were viewed as a safe haven destination.
  
  
• The drop in oil prices has only worsened the current account deficit: The net current account imbalance has expanded considerably and the latest data for Q1 showed a deficit of $17bn. It is likely to persist in April trade data as well.

Currency Insights & Strategy: (USD/CAD)

The funding of the current account balance is the only concern for now that the deficit has widened.

The strong rise in bond inflows so far this year is likely sustainable.

Near month contracts with 25 delta risk reversals At-The-Money USD/CAD pair bid for calls.