Trade Idea: Buy USDCAD 1.2860, target 1.3115 and stop 1.2750: FXWW

From the FXWW Chatroom: USD: Yields are doing the heavy lifting for the USD and we expect this continue. This may be increasingly negative for ‘risky’ currencies if tightening in financial conditions sees investors reduce exposure. With few US releases of note in the week ahead and no major shift in tone anticipated from Fed speakers or the FOMC Minutes, it is not clear what is likely to reverse expectations on US outperformance that kicked off recent moves.

We believe this argues for an extension of recent USD appreciation as investors that have been caught behind recent moves catch up. Further, the more US yields rise, the more risk there may be for increased participation from longer-term investors who have thus far been largely sidelined.

Positioning: While there has been a shift in favour of long USD positioning among short-term investors in recent weeks, CAD buying has lagged behind. According to our Global Flows analysis, investors have actually been buyers of CAD in recent weeks. The recent flagging in buying momentum may signal that the impact of higher oil prices and optimism on NAFTA is better discounted and risk-return may favour some catch-up from CAD with the broader USD buying move.

NAFTA, data: Offside positioning may leave CAD vulnerable to even moderate deterioration in news on trade policy. Recent comments from Mnuchin and Ryan and the consensus across Citi’s recent NAFTA call suggest strong risk the vote slips into 2019. More broadly, we’re cautious on CAD given too much good news is priced in and the it’s hard for the data to satisfy the rich OIS given supply side upgrades from the BoC. With investors having only begun to pare back rate expectations in response to recent softer data, there remains risk for dovish surprises at the upcoming BoC meeting.
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