Trade Synopsis: SHORT CAD
Trade Recommendation: SHORT CAD at 1.4650 (CMP is 1.4450), TP 1.4250 & SL 1.4850
CAD has been beaten significantly against USD not only because of DXY strength recently but also because of interest rate differentials. Even after BOC has cut its policy rate in CY24 to 3.25% from 5%, Fed has only cut by 100 bps in similar period. Even going further ahead, markets price in only 39 bps of cut in CY25 from Fed where as they expect 67 bps of cut by BOC in similar period. So, while BOC is fast approaching it’s below neutral level of rates, Fed is likely to remain on hold at least till March. Even current Fed pricing of 39 bps is smaller than the 50-bps cut as shown in the 18th Dec Fed DOTS. Current level of CAD looks to us pricing in maximum optimism on BOC rate cut moves while maximum pessimism on FED cut moves. Hence this provides us a trading opportunity to Short CAD around 1.4650, with TP of 1.4250 and SL at 1.4850. CMP is 1.4450 so we have to wait for our level of 1.4650 to come. Most likely this week's US employment data could trigger such a move.
Summary: SHORT CAD @ 1.4650 (CMP 1.4450), TP 1.4250 & SL 1.4850
Risks to the view: Canadian data comes worse than expected and more cuts gets priced in CAD curve than current 67 bps cut. Or US data continues to come stronger than expected & market prices in fewer cuts than even the current 39 bps of cut being priced.
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