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MARKETS TOO RELAXED ABOUT CANADIAN DOLLAR DECLINES - WESTPAC
It was less than three weeks ago that the Canadian dollar tumbled to as low as C$ 1.479 to the U.S. dollar, its weakest in over 20 years, on the back of fears of substantial U.S. tariffs on Canadian goods.
Those tariffs were postponed for a month, and the currency has strengthened back to C$1.42, but analysts at Australian bank Westpac think investors are now far too sanguine. CAD=D3
"USD/CAD is trading on the cheap side of yield spreads and materially under-pricing the potential for renewed tariff risks into the upcoming 4 March postponement date," they said on Wednesday.
Risk reversals reflect the difference in price of an option to sell the Canadian dollar and one to buy it. That spiked to a 27-month high premium of 1.7 on February 3, as traders rushed to put on positions that would allow them to sell the Canadian currency. But, as Westpac notes, a lot of that bearishness has since evaporated, leaving the one-month risk reversal at 0.7.
Westpac's trade recommendations are not on USD/CAD itself but rather the crosses. They recommend traders look for Canadian dollar weakness against the Aussie dollar AUDCAD=D3 and Japanese yen CADJPY=EBS, as they see the Bank of Japan and the Reserve Bank of Australia being more hawkish.
(Alun John)
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EARLIER LIVE MARKETS POSTS
WHO CARES ABOUT TARIFF THREATS? CLICK HERE
EUROPE BEFORE THE BELL: STOCKS RALLY CALMING DOWN CLICK HERE
MORNING BID MARKETS BECOMING NUMB TO TARIFF VOWS CLICK HERE
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