Synopsis:

Credit Agricole warns that USD/CAD's recent pullback does not signal a sustained CAD recovery, as uncertainty around trade risks and the Bank of Canada’s rate path persists. Despite positive developments on border security talks, CAD remains vulnerable, and USD/CAD risk reversals have turned richer, signaling renewed hedging demand.

Key Points:

1️⃣ USD/CAD Consolidates Near 1.4150 📉

• The pair failed to track tighter USD-CAD rate differentials, suggesting lingering uncertainty.
• Two possible drivers: (1) Lower risk of immediate US tariffs or (2) Weaker expectations of BoC rate cuts after sticky January CPI data.

2️⃣ Trade War Risks Still Looming 🔥

• The US ambassador to Canada noted progress on border and drug issues, raising hopes for tariff delays beyond March 3.
• However, a full resolution is uncertain, keeping CAD vulnerable to further downside.

3️⃣ BoC Policy Outlook Remains in Flux 🏦

• Canada’s January CPI was stickier than expected, reducing odds of aggressive BoC easing.
• Governor Macklem’s remarks this week are unlikely to shift the outlook, as the BoC awaits clarity on trade risks.

4️⃣ USD/CAD Hedging Activity Picks Up 🚨

• Risk reversals have turned richer, signaling renewed demand for downside protection in CAD.
• Previous signs of cooling volatility have stalled, suggesting investors are still cautious on CAD stability.

Conclusion:

While CAD has stabilized, it is not yet in the clear. Trade tensions, policy uncertainty, and increased hedging activity suggest that USD/CAD volatility could return, and further CAD weakness cannot be ruled out in the near term.