Citi Sees Shift in Interest-Rate Differentials Favoring CAD vs. USD
Citi has initiated a short position in USD/CAD, betting on a reversal of interest-rate differentials between the two countries. The bank expects upcoming economic data to challenge expectations for U.S. monetary policy and is targeting a price of 1.35 USD/CAD.
The main driver of this move is expected to be the U.S. dollar leg, as Citi's economists anticipate that incoming data will fail to justify a September Federal Reserve rate hike. The bank points out that recent minutes from the Fed show most officials expecting inflation to decline over the remainder of the year.
The Canadian dollar also has support from a more hawkish-than-expected Bank of Canada stance, with Governor Tiff Macklem stating that upside risks to inflation have increased and the central bank is prepared to deliver consecutive rate hikes if needed. Citi notes that market pricing of the Fed-BoC rate differential is now at the upper end of its range for the year.