Risk-reward attractive for CAD shorts – BNPP

Daniel Katzive, Head of FX Strategy at BNP Paribas, favours positioning for USDCAD gains from current levels as a retreat in crude, widening rate differentials and a potential turn for the worse in the risk environment are all potential catalysts for a CAD retreat.

Key Quotes

“We recommend buying a 3-month 1.34/1.36 call spread. We offer the following arguments in favour of adding to short CAD exposure at this time:

1) Oil is at the top of its range. Crude prices have gained in the aftermath of the November 30 OPEC deal, with front-month WTI prices above USD 50/bbl. Our commodity strategists believe current levels are unlikely to be sustained as WTI levels above USD 50/bbl will invite North American producer hedging and production, which will threaten needed market rebalancing and inventory reduction. We continue to forecast a retreat towards USD 45/bbl in the weeks ahead, which would be consistent with a higher level of USDCAD.

2) Rate differentials. The Bank of Canada has signalled its policy outlook is set to diverge further from that of the Fed. Our economists expect an easing in January, but even steady Bank of Canada policy would allow front-end rate differentials to continue to move against the CAD.

3) Positioning. Our BNP Paribas positioning framework signals the market has turned long the CAD for the first time since Q2 2016. Long CAD positions could be vulnerable to a retreat in crude prices and/or a turn for the worse in the risk environment as markets shift to focus on US fiscal policy implementation risks  and trade policy uncertainties.”