Investing.com -- Canadian pension funds may be positioned to reshape FX markets as they reassess longstanding U.S. dollar exposures, according to UBS Global FX Strategist Vassili Serebriakov. A decade-long strategy of overweighting U.S. assets, alongside minimal FX hedging, may no longer be serving its original purpose, he said in a recent client note.
Serebriakov noted that Canadian pensions have historically viewed long USD positions as a hedge against global shocks, but recent market behavior suggests that protection may be waning. Despite increased volatility, the loonie has strengthened year-to-date while U.S. equities have declined, potentially amplifying portfolio losses rather than cushioning them.
Serebriakov noted that the top four Canadian pension funds hold about 47% of total assets in the U.S. dollar and hedge only 16% of that exposure, leaving performance increasingly vulnerable to CAD-USD fluctuations. Some of that exposure exceeds what their geographic allocations imply, potentially due to holdings of USD-denominated debt outside the U.S.
With roughly CAD 1.1 trillion in USD assets held by Canadian funds, a 10 percentage point reduction in allocations or increased hedging could significantly impact FX markets. Such a shift would drive higher demand for the Canadian dollar and potentially double Canada's balance of payments portfolio investment surplus.
Mounting political pressure may accelerate this trend as policymakers look to channel pension capital into domestic investments. Serebriakov pointed to parallels with post-election Germany, where policy momentum spurred economic nationalism and focused capital inward, leading to revaluations in local currency and equity markets.
Recent Canadian fiscal proposals, including measures to relax the “30% rule” on equity holdings, suggest the government also sees pension assets as instrumental for housing, infrastructure, and R&D. Serebriakov argues that this scenario remains underpriced by markets, pointing to net short CAD positioning and limited investor focus on Canadian policy momentum.
In this environment, Serebriakov sees USD/CAD biased lower, especially as momentum builds behind the “Buy and Invest in Canada” narrative. He also recommended staying short GBP/CAD as a trade expression, citing strong domestic capital flows and evolving investment narratives.
With the Canadian federal election approaching on April 28, investor focus may increasingly shift toward policies encouraging capital repatriation. For the Canadian dollar, that could mean a fundamental repricing is already underway.
