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Strategists at Morgan Stanley upgrade their stance on the Canadian Dollar to neutral.
Having held a "bearish skew" on the Canadian Dollar, Morgan Stanley's strategists think stars are aligning for a more robust spell.
Given the shift in tactical stance, the investment bank's strategy desk says it exits a 'short' trade that looked to benefit from ongoing CAD weakness.
Two of the three original reasons for betting against the Canadian unit were elevated trade uncertainty expectations for a Bank of Canada interest rate cutting cycle terminating at 1.75%.
However, both assessments have since changed.
"While trade uncertainty remains high from a historical perspective, it has eased somewhat since April due to recent US trade deals and USMCA exemptions. Our economists have revised their BoC terminal rate forecast to 2.25%, reflecting persistent core inflation after 225bp of rate cuts," says a note from Morgan Stanley.
Analysts think USD/CAD has room to decline from a compression in rate differentials (based on the evolution in the difference between U.S. and Canadian interest rate expectations).
Economists meanwhile expect next week's Bank of Canada meeting "to be a catalyst for CAD strength."
"A USD/CAD-positive outcome would be if the BoC shifts its focus towards weak 2Q BOS results rather than inflation, but this is not our base case," says Morgan Stanley.
The Canadian Dollar has meanwhile risen against most peers this week as it follows the U.S. Dollar higher, confirming it to be a proxy for USD strength on the crosses.
The trade deal agreed between the EU and U.S. lowers global trade uncertainty, allowing the Dollar to move higher. It also suggests there is enough momentum on the U.S. side to allow it to push for a new accord with Canada.