Jan 24 (Reuters) - Chart 1: USD/CAD short-run bias remains higher
leading into Feb 1
U.S. President Donald Trump appears to have taken a softer tone towards China
regarding tariffs, though the same cannot be said for Canada and Mexico. The
president has reiterated his threat that he could impose 25% tariffs on both
countries as soon as Feb 1. In turn, the Canadian dollar has taken the threat in
its stride as USD/CAD pulls back from recent highs. The looming threat of
tariffs should keep the pair underpinned in the short-run and much how USD/CAD
reacted to the initial threat in late November, the pair has held the Trump
reaction level at 1.43.
Chart 2: BoJ hiked delivered but U.S. yields remain the key driver for USD/JPY
The Bank of Japan delivered a well telegraphed rate hike at its January meeting,
taking the key policy rate to 0.5% from 0.25% – now at the highest level since
2008. However, given the plethora of reports pointing towards said outcome, the
impact on the yen was muted. With the clearing of BoJ event risk, USD/JPY should
predominantly take its cue from the direction of U.S. yields, as has been the
case in recent months.
Chart 3: Dollar at risk should crowded longs lack patience
The biggest challenge for dollar bulls in the short-run is positioning. The last
few months have seen a significant increase in dollar exposure and rightly so
given the prevailing narrative. However, that positioning has become crowded –
net longs sit at the highest level since November 2015 – and with the avoidance
of shock-and-awe policies such as day one tariffs under Trump, some of that
tariff risk premium embedded in the dollar has been unwound. FX markets are in
limbo, which leaves dollar vulnerable to a cleansing of positions. Though it is
difficult to forcefully lean against the dollar, the more time passes without
aggressive tariffs, the more likely it is that the dollar will be exposed to
positioning squeezes.
USD/CAD hourly chart
USD positioning
USDJPY vs yields
(Justin McQueen is a Reuters market analyst. The views expressed are his own.)