Canadian Dollar : Modest downside on trade risks and yields – HSBC

HSBC strategists highlight a bearish stance on the Canadian Dollar (CAD), noting that the breakdown in US–Canada trade talks has driven USD/CAD higher but is unlikely to be a persistent drag. They argue that trade risks are largely priced in and that broad Dollar moves and 2‑year yield differentials point to only modest further USD/CAD upside.

Trade tensions and yield spreads

"The breakdown in US–Canada trade talks supports our bearish CAD stance, especially as the news flow had shown signs of improvement just over a week ago."

"It is tempting to argue that the trade dispute will continue to weigh on CAD. While it is currently relatively narrow, affecting only 5% of Canada’s exports to the US, there is scope for it to widen if tit-for-tat escalation becomes the pattern."

"There are also no immediate plans to resume talks, and reports (Bloomberg) suggest the standoff could extend beyond the US mid-term elections in November."

"The challenge for CAD bears is that these risks are now well understood and therefore likely priced in. The CAD could be more vulnerable if the tit-for-tat escalation were to be especially acute or prolonged. We would not rely on either."

"Instead, we continue to see the more pertinent drivers of USD/CAD as the broader USD trend (excluding the CAD), and the path of 2-year yield differentials. Both currently look more consistent with USD/CAD upside, though valuation suggests any further gains may be modest unless the USD strengthens more broadly."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)