HSBC Downgrades Canadian Dollar on Trade Risks and Yield Spreads

HSBC strategists are maintaining their bearish stance on the Canadian Dollar (CAD), citing the breakdown in US-Canada trade talks as a key factor driving USD/CAD higher. While the current trade tensions may have an impact, the analysts believe that these risks are largely priced in by the market.

The strategists argue that the broader USD trend and 2-year yield differentials will continue to drive USD/CAD upside, although any gains may be modest unless the USD strengthens more broadly. They note that trade tensions between the US and Canada are currently narrow, affecting only 5% of Canada's exports to the US.

However, HSBC strategists caution that if the tit-for-tat escalation continues or widens, it could have a greater impact on the CAD. Nevertheless, they do not rely solely on this scenario for their bearish outlook on the currency.