BCA Research says that the strong currency and a weakening economy are positive for Canadian bonds, even versus hedged global benchmarks.

In a research note, BCA points out that the Bank of Canada aggressively cut its target rate by 50 basis points in light of what it sees as “important downside risks.”

“Retail sales outside of the volatile autos and gasoline sectors have softened, consumer confidence has dropped sharply, Canadian credit conditions have tightened markedly and real industrial GDP fell by 0.7% (not annualized) in December. Moreover, Canadian exports are beginning to contract as he U.S. economy slips into recession,” it notes.

“Policymakers correctly argue that an economic decoupling from the U.S. is unlikely,” BCA adds. “The BoC cannot afford to lag the Fed significantly in the pace of rate cuts because it would place additional upward pressure on the Canadian dollar, which is again trading above par with the US dollar.”

As a result, it concludes, “The recent outperformance of Canadian bonds versus global bond benchmarks will continue.”