A Monday note from DB on USD/CAD, an even better one now its Tuesday!

G10 trade of the week is long USD/CAD Entry 1.3415 (lower than that as I post – bargain!)

  • Stops loss is 1.3225 
  • Target is 1.3665 

Reasoning (in summary):

  • bar is high for the Fed to validate market pricing of almost 70bps of easing this year. 
  • domestic data are not unequivocally poor
  • financial conditions remain easy
  • and there is still a possibility of a breakthrough on the administration’s trade negotiations with China at the upcoming G20 summit
  • We would expect a Fed disappointment to be risk-negative and dollar-bullish–an ideal mix for USD/CAD. In case we’re wrong and the Fed meets dovish expectations, we believe that pricing for the Bank of Canada would (finally) need to converge. 
  • At any rate, with not even one insurance cut fully priced for this year, the scope for a dovish BoC repricing makes CAD a better short into the Fed than AUD or NZD, which are already pricing Reserve Bank cuts and are closer to being oversold technically. What’s more, net shorts in CAD are now lighter than in the Antipodeans, and the Canadian data surprise index has reached thin air at 120 (the highest in the world) ahead of important inflation and retail sales prints this week.


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