Synopsis:

Goldman Sachs highlights the Bank of Canada (BoC) as a prime example of near-neighbor policy divergence within the G10, suggesting that this divergence is more effectively captured in rates rather than FX. Despite potential policy differences, the Canadian Dollar (CAD) has shown resilience and even strength, particularly in the context of a robust US Dollar and favorable market conditions.

Key Points:

• Context of CAD Performance: The Canadian Dollar typically excels during periods of US Dollar strength, alongside rising equity and oil prices, reflecting its beta relationship to the US Dollar. This occurs despite potential dovish shifts by the BoC, showcasing the CAD's robustness in risk-on market scenarios.

• Short EUR/CAD Strategy: Goldman Sachs recommends a short EUR/CAD position to capitalize on the dynamics of US exceptionalism, the anticipated rise in oil prices, and a weakening Euro. This position is expected to benefit from the overarching market trends and the relative strength of the Canadian economy.

• Rates vs. FX Expression of Policy Divergence: While the BoC’s policy divergence is notable, Goldman advises that such divergence is best expressed through rates rather than direct FX positions. This approach allows for a more nuanced capture of the implications of Canada's monetary policy relative to its G10 peers.

Conclusion:

Goldman Sachs maintains a strategic position that aligns with the strength of the Canadian Dollar against the backdrop of broader market trends and US economic performance. The firm underscores the effectiveness of expressing near-neighbor policy divergence through rates, providing a refined strategy for capturing economic disparities within the G10. Investors are encouraged to consider both the short EUR/CAD position and rate differentials as tools to navigate and capitalize on these dynamics.