Synopsis:

The sharp drop in the USD in 2025 is prompting Canadian investors—among the largest holders of US assets—to reconsider their currency hedging strategies. Weaker correlations between USD/CAD and US equities reduce the natural hedge effect, increasing incentives for proactive hedging and thereby contributing to USD selling pressure.

Key Points:

• Shift in FX-Equity Correlations:
  • Historically, USD/CAD would strengthen during US equity selloffs, providing Canadian investors a natural FX hedge.
  • This relationship has weakened in 2025, making unhedged positions riskier.

• USD Weakness Spurs Hedging Demand:
  • The USD's downtrend makes unhedged US assets less attractive for Canadian investors.
  • Growing interest in hedging US exposure could accelerate USD sales in FX markets.

• Broader Hedging Flows at Play:
  • BIS notes that non-US investor hedging, especially by Asian investors, has already played a role in USD weakness in April and May.
  • Canada may now be joining this trend, potentially reinforcing downward pressure on the dollar.

Conclusion:

As the USD weakens and FX-equity hedging correlations deteriorate, Canadian investors may ramp up currency hedges on US holdings. This behavioral shift could act as a structural driver of USD underperformance, especially if mirrored by other foreign asset holders.