Canadian portfolio investment in foreign securities rose to $25.36bn in February, up from $11.39bn in the previous period.
The data shows an increase of $13.97bn from the prior figure, indicating a faster pace of Canadian buying of overseas securities in February.
The February data showing a $25.36 billion outflow into foreign securities is a significant bearish signal for the Canadian dollar. This level of capital leaving the country, more than double the previous month, creates direct selling pressure on the CAD. We should therefore anticipate continued weakness against the US dollar in the near term.
Given this sustained outflow, we are viewing the USD/CAD exchange rate, currently trading around 1.3850, as having further upside potential. Purchasing call options on USD/CAD with May and June expiries and strike prices around 1.4000 offers a risk-defined way to position for this move. This strategy profits if the Canadian dollar weakens as we expect.
This search for foreign returns is likely happening because Canadian markets are underperforming; the S&P/TSX is up a sluggish 1.5% year-to-date while the S&P 500 has gained over 6%. This divergence supports using derivatives to bet against the Canadian stock market. We see value in buying put options on broad TSX index ETFs to hedge against this relative weakness.
Furthermore, this capital flight could influence the Bank of Canada to adopt a more cautious or dovish stance to avoid tightening financial conditions. Interest rate derivatives are now pricing in a lower probability of a rate hike by mid-year than they were just last month. This indicates the market is beginning to factor in the negative economic signal from the outflow data.
This trend is a stark reversal from what we saw through much of 2025, when strong commodity prices and a stable domestic outlook attracted significant foreign capital. The speed of this sentiment shift suggests the current capital outflow may be the start of a more durable trend. We must adjust our strategies away from the domestic-focused approach that worked previously.
