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O, Canada, You're Looking Good

Canadian Loons
Winfried Wisniewski |The Image Bank | Getty Images
Canadian Loons

Between falling commodity prices and risk aversion, the Canadian dollar got hammered in September. But these strategists say the loonie could soon lift off again.

September was a rough month for the Canadian dollar. Lower commodity prices hurt, and general worries about Europe and the global economy led investors to run for the safest havens. All told, the loonie dropped about 8 percent. But the strategists at HSBC "are not so pessimistic on the CAD," they wrote in a note to clients.

David Bloom, HSBC's head of foreign exchange strategy, and his team compare Canada's current situation to that of the U.S., and find a lot to like up north.

"The U.S. backdrop not only remains far more stressed than that in Canada, but conditions have deteriorated further," they say. Also, the Fed is more accommodative than the Bank of Canada right now, the Canadian budget is in better shape, and if emerging-market economies start looking better, "Expectations that growth there will continue to fuel demand for commodities and commodity-linked currencies should pick up again."

Speculators now have net short positions on the loonie, breaking a nearly two-and-a-half year streak, the HSBC strategists say. But they think the currency will consolidate around current levels, and they anticipate an "eventual rebound" when risk appetite recovers.

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