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Trade conflict has been a great tormentor this week as the US President Trump’s formal executive order on steel and aluminum tariffs moved hostilities from the realm of rhetoric into action, and further intensification cannot be ruled out given the ascendancy of trade hawks in the White House following Gary Cohn’s departure.
Markets relief-rallied on exemptions for NAFTA partners but the importance of the China/IP Section 301 probe cannot be overstated in the context of these developments.
The disconnect between a sharp ramp-up in decibel levels around trade and the lack of a commensurate market response has a whiff of complacency about it and continues to support our cautious outlook in FX.
Despite the stay of execution this week, CAD is on the watch list as a potential short given Canada's extreme trade footprint with the US and the room for de-pricing of BoC hikes.
The resilience of risk markets to trade headlines will be challenged in the event of another upside surprise on US CPI next week after a similar beat in February.
Commodity FX vs USD is vulnerable to declines in the lead up to a potential dot plot shift at the March FOMC, especially given marginal dovish undertones to RBA, BOC, ECB and BoJ rhetoric this week.
Stay long USDCAD vs. short USDRUB 3M 35D USD call switch, 100:65 vega ratio as the US growth expectations upgraded on policy driving a broad $ rebound.
Well, on hedging grounds, one can keep the potential bullish risk of this pair on the check by adding long positions in futures contracts as the underlying spot FX has constantly been rising from the lows of 1.2247 levels to the current 1.3066 levels.
The long futures position of mid-month tenors are advocated with a view to arresting further upside risks, we reiterate that it is wise to use dips to deploy long hedges using the derivative contracts.
Currency Strength Index: FxWirePro's hourly CAD spot index is displaying shy above -155 levels (extremely bearish), while hourly USD spot index was at 39 (mildly bullish) while articulating (at 08:09 GMT). For more details on the index, please refer below weblink:
http://www.fxwirepro.com/currencyindex
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