MS – USDCAD VIEW : FXWW

From the FXWW Chatroom: The rally in USDCAD on the back of the US imposing trade tariffs on Canadian steel imports provides a good selling opportunity, we think. First, US economic advisor Kudlow’s comments that trade escalation may weaken the US economy suggest that trade escalation is unlikely, supporting our base case that a negotiated, relatively moderate outcome is one that is more likely, which should help CAD rally. Second, the implementation of the steel tariffs is unlikely to stop the BoC from hiking rates we think, as they have just shifted to a hawkish stance in their latest statement and trade policy uncertainty has been factored into their decision. Markets are currently pricing about 40bp of BoC hikes for this year, giving a bit of room for more hikes to be priced. Third, three out of four factors in our USD scorecard have turned around, suggesting USD weakness is back on the cards. Fourth, CAD positioning is still short, suggesting some support for CAD as shorts are unwound. A risk to the trade is a dovish turn in the BoC, which would weaken the CAD.

We like to sell USD/CAD at market with a target of 1.22 and stop of 1.3050.

MS
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