FX analysts Jayati Bharadwaj and Mark McCormick of TDS note that tariffs and market positioning remain dominant themes in client discussions, with markets potentially underestimating trade risks, particularly for Canada.
Tariff Risks in USD/CAD Pricing
While markets have quickly discounted tariff risk premia in USD/CAD, the analysts argue this may be premature.
- The U.S.-Canada trade relationship remains uncertain, with potential tariff threats tied to renegotiating the USMCA.
- Even if tariffs are used as a bargaining tool, they may need to be in place for some time before negotiations begin.
USD Positioning & Market Outlook
- USD positioning has shifted from an extreme long to a more neutral stance on a six-month scale.
- The analysts see opportunities to buy USD on dips, especially against currencies where Trump-related risks are underpriced, such as CAD and EUR.
- Historical trends suggest markets can remain long USD for extended periods, as seen during the 2018-2019 trade war.
TDS Trade Strategy & Macro Outlook
TDS has gone long USD/CAD call spreads with a three-month expiry.
Their macro framework assigns a negative trading weight to CAD, citing:
- Weak fundamentals
- Rising trade uncertainty
- Limited fiscal flexibility amid domestic political concerns
Combined with strong USD factors—rates, growth, carry, and equities—these conditions should drive USD/CAD higher in the near term.
Despite the fading tariff risk premia, the analysts warn that Canada’s macro outlook remains fragile, keeping USD/CAD biased to the upside.
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