Synopsis:

Morgan Stanley removes its bearish bias on CAD, citing tariff fatigue and already-priced Fed-BoC policy divergence. However, growth concerns, potential tariff risks, and oil price outlook keep them from recommending short USD/CAD positions for now.

Key Points:

1️⃣ Tariff Fatigue Reduces CAD Sensitivity 🏷️

• Investors have become less reactive to tariff-related headlines.
• This has contributed to stabilizing CAD performance.

2️⃣ Fed-BoC Policy Divergence Already Priced In 📊

• Markets expect ~130bps more divergence between the Fed and BoC by end-2025.
• Limits further CAD downside pressure from monetary policy.

3️⃣ Why Not Short USD/CAD Yet? 🚧

• Canada’s growth outlook remains weak, still below potential for 2025.
• Tariff concerns could resurface ahead of April 1.
• Oil price risks could weigh on CAD if prices decline further.

Conclusion:

Morgan Stanley removes its bearish CAD skew but remains neutral on USD/CAD, not yet recommending short positions due to growth risks, potential tariff concerns, and weaker oil prices. Further evidence of BoC rate cuts benefiting the economy could shift their CAD outlook more positively.