FX Daily: Trive Bullish on USD/CAD

The USD outlook is mixed. Market concerns include potential Fed rate cuts and trade conflict risks, while strong August seasonality and "Trumponomics" offer support. Upcoming data, such as the June core PCE and July PMIs, could influence USD performance. In contrast, the CAD faces pressure from expected BoC rate cuts due to soft economic data, rising unemployment, and cooling inflation. Markets anticipate multiple rate cuts this year, with the focus on the next rate decision and the Monetary Policy Report.

USD: Politic VS Fed

Although the dollar is currently overshooting rates and USD positioning is quite extended, markets believe that any pull-back in the dollar will not be sustained over the medium term and should be shallow due to the uncertain cyclical backdrop outside the US and trade conflict risks from the US election. Additionally, strong USD seasonality in August can provide tactical support.

The USD outlook is mixed. On the negative side, markets anticipate that the Fed could cut rates in September, potentially leading to USD underperformance. On the positive side, "Trumponomics" could bolster the USD through potential tax cuts, trade tariffs, immigration curbs, and fiscal stimulus. Despite the near-term dovish sentiment (rate cuts) being a key driver for the USD, some analysts maintain a broadly constructive USD outlook for the second half of 2024.

This week's June core PCE print could confirm that US inflation remains sticky, which might correct the excessively dovish Fed market outlook, boosting the USD. Additionally, any positive surprises from the July PMIs could also provide support.

Current strength between USD & CAD

CAD: Confirmed further weakness?

As expected, the Bank of Canada (BoC) cut the rate by another 25 basis points yesterday, reducing it to 4.25% from 4.50%. During the meeting, the BoC revealed that the domestic economy remains weak relative to population growth, with household spending soft and debt payments high. Additionally, the labor market shows some slack, with a rising unemployment rate and moderating wage growth, although it remains elevated.

During the press conference, Governor Macklem indicated that further rate cuts would be reasonable if inflation continues to ease in line with the BoC’s forecast, but the timing will depend on incoming data. While a few inflation components, such as shelter and services inflation, remain high, the BoC noted that the risks to the inflation outlook are balanced compared to the April meeting, where there were concerns about upside risks. In summary, as the BoC opened the door for further cuts, the July meeting is considered somewhat dovish.

Retail Sentiment: 86% short, 14% Long

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