We think the current paradigm is similar to 2017 where EURUSD can decouple from front-end rates and head higher. Specifically, current eurozone investor positioning is likely conducive to a rotation from US equities into European stocks (see EURUSD: Lessons from 2017, dated 3 April). We took profit today on our long EURUSD spot trade after the pair hit our trailed stop, but recent price action seems to support our structurally bullish view on the European currency (see FX: Take profit on EURUSD spot, stay long via options, dated 7 April).
EUR positioning remains neutral (+8 on a +/-50 scale; see BNPP Global FX Positioning Tracker, dated 7 April) and we think investors are more likely to build longs going forward. We therefore look for additional opportunities to add to our existing long delta position and complement our current EUR longs (versus the THB in spot and the USD and GBP in options).
We think the CAD is an attractive funder for the following reasons:
1) Canada was left relatively unscathed from President Donald Trump’s ‘Liberation Day’ reciprocal tariff announcements. We highlighted in FX: Tariff showdown on 24 March that CAD shorts were well held into the event and were most vulnerable to a positioning washout. This appears to have partially occurred (Figure 1), which is a notable divergence from the broader FX complex, where shorts were built against high-beta pairs.
2) We view the partial cleanup in positioning as creating an attractive entry point to re-enter shorts, rather than precipitating a full capitulation of existing short positions. There now seems to be ample space for the CAD to catch down.
3) If the probability of a US recession rises (as detailed in Global Macro: The price of liberation is high on 2 April, we think it is higher now than our previous base case of 35%), we would expect the CAD to underperform the broader G10 complex given the interconnectedness of the American and Canadian economies.
4) Even though Canada did not see additional tariffs imposed on 2 April, accounting for tariffs on non-USMCA goods as well as those on automobiles and steel/aluminum, we estimate that the effective rate is in the vicinity of 12% – still a meaningful hit to trade (Figure 2). Growth data has already started to weaken with Friday’s Canadian employment statistics showing a glaring fall in headline employment and the breakdown by industry potentially indicating that tariff concerns were already evident, as the largest decline was in the wholesale and retail trade sector.
5) We think there is a favorable asymmetry for CAD downside ahead of the Bank of Canada meeting on 16 April. The BoC noted in March it was more attuned to upside risks to inflation and inflation expectations, the latter of which made itself quite clear as accelerating in the Q1 Business Outlook Survey. If the BoC focuses on inflation this month and remains on hold, we expect markets can price in deeper rate cuts for subsequent meetings. Conversely, if policymakers switch focus again toward downside risks to growth, that would be viewed as a dovish shift.
