Inflows into CAD bonds flat in November – Nomura

Analysts at Nomura note that the non-residents increased their holdings of Canadian securities by C$7.2bn in November, after increasing them by C$15.8bn in October and this is the 16th consecutive month of purchases by foreigners.

Key Quotes

“The buying was concentrated in Canadian equities (C$5.5bn) with some inflows into Canadian bonds as well (C$2.9bn), which was partly offset by outflows from Canadian money market instruments (-C$1.1bn). Bond purchases were led by a pick-up in purchases in the corporate bond space (C$5.6bn), particularly private companies (C$3.7bn). These inflows were partly offset by outflows out of Canadian government bonds (-C$2.7bn), mainly concentrated within provincial government bonds (-C$3.0bn). Canadian investors on the other hand reduced their holdings of foreign securities (bonds and equities) to the aggregate tune of -C$7.9bn, primarily led by outflows from foreign bonds (-C$4.8bn).”

“On a regional basis, the buying of Canadian bonds was almost wholly led by US accounts (C$7.1bn). US accounts led purchases of Canadian bonds (C$4.8bn) and Canadian equity securities (C$3.9bn), and also led net sales of Canadian money market securities (-C$1.5bn) in November. Other major countries that usually demonstrate meaningful flow (UK, EU, and Japan) showed little interest in Canadian securities in November.”

“Overall, net purchases of Canadian bonds clearly took a hit amid heightened global volatility conditions after the US election. Nevertheless, net purchases remained positive, supported by strong purchases of USD-denominated Canadian bonds while purchases of CAD-denominated bonds stayed flat. These flows form a consistent picture alongside USDCAD price action during the month that saw the cross make new multi-month highs of around 1.36, a level only to be re-tested again by the end of December on the back of strong USD momentum after the Fed meeting. The tug-of-war between higher energy prices (positive CAD) and a widening yield differential to the US (negative CAD) remains the underlying factor determining price action currently, and we think this implies a grind higher in USDCAD beyond Q1 2017.”