LIVE MARKETS-Markets too relaxed about Canadian dollar declines - Westpac

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MARKETS TOO RELAXED ABOUT CANADIAN DOLLAR DECLINES - WESTPAC

It was less than three weeks ago that the Canadian dollar tumbled to as low as C$ 1.479 to the U.S. dollar, its weakest in over 20 years, on the back of fears of substantial U.S. tariffs on Canadian goods.

Those tariffs were postponed for a month, and the currency has strengthened back to C$1.42, but analysts at Australian bank Westpac think investors are now far too sanguine. CAD=D3

"USD/CAD is trading on the cheap side of yield spreads and materially under-pricing the potential for renewed tariff risks into the upcoming 4 March postponement date," they said on Wednesday.

Risk reversals reflect the difference in price of an option to sell the Canadian dollar and one to buy it. That spiked to a 27-month high premium of 1.7 on February 3, as traders rushed to put on positions that would allow them to sell the Canadian currency. But, as Westpac notes, a lot of that bearishness has since evaporated, leaving the one-month risk reversal at 0.7.

Westpac's trade recommendations are not on USD/CAD itself but rather the crosses. They recommend traders look for Canadian dollar weakness against the Aussie dollar AUDCAD=D3 and Japanese yen CADJPY=EBS, as they see the Bank of Japan and the Reserve Bank of Australia being more hawkish.

(Alun John)

EARLIER LIVE MARKETS POSTS

WHO CARES ABOUT TARIFF THREATS? CLICK HERE

EUROPE BEFORE THE BELL: STOCKS RALLY CALMING DOWN CLICK HERE

MORNING BID MARKETS BECOMING NUMB TO TARIFF VOWS CLICK HERE