– USD off the highs, we recommend selling USDCAD
The USD has been in a corrective mode after DXY touched a high of 83.166. As we have been highlighting, market positioning has turned excessively optimistic on the USD, especially against commodity currencies such as AUD and CAD. For the latter, we believe that a number of factors argue in favour of a recovery, prompting us to initiate a USDCAD short trade recommendation at 1.0270, targeting 0.9935, with a stop loss at 1.0425. Stronger US growth in the absence of Fed tightening (our base scenario) should be CAD positive given the economic linkages between the US and Canada. This is evident by the CAD’s relative outperformance after the stronger than expected US retail sales and jobless claims this week. Today’s US Feb industrial output data (we expect a gain of 0.4% m/m) and March Michigan consumer sentiment should support this trend. Another factor which we have highlighted is the unusual divergence between Canadian crudes such as Western Canada Select (WCS) and global benchmarks such as WTI. That divergence has been correcting sharply in recent weeks, such that the spread is now down to a five-month low (around USD 20/bbl from USD 35/bbl in January). We stay with our long CADNOK trade recommendation, established in late January at 5.4760, targeting 5.7500 (currently trading at 5.6618). Finally, we believe current market positioning is supportive of CAD gains. Our BNP Paribas positioning monitor reports that CAD is among the largest short positions along with JPY and GBP (see chart). We see this as clearly inconsistent with relative fundamentals, suggesting that any positive news for CAD could prompt a significant unwind of short positions.
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BNP Paribas