Deutsche Bank Notes "Huge" Exposure to U.S Assets by Canadian Investors; Implications for Canadian Dollar

Societe Generale in its early Tuesday economic news summary pointed out:

— US dollar firmer into month-end despite softer front-end yields, late recovery lifted S&P to a positive close. United States President Trump speaks Tuesday in Detroit, plans to reduce impact of auto tariffs by alleviating some duties imposed on international parts in domestically-manufactured cars. Auto companies paying tariffs wouldn't be charged other levies, such as on steel and aluminum (WSJ).

— Spain's HICP steady at 2.2% year over year in April, above forecast. Core climbs to 2.4% from 2.0%. Q1 gross domestic product growth 0.6% quarter over quarter, or 2.8% year over year, consensus was 0.7%, Q4 revised down by 0.1pp to 0.7%. Private consumption 0.4%, exports goods/services 1.0%.

— Canada: Liberal party of Prime Minister Carney wins snap election with 167 seats but falls short of 172 required for a majority, votes still being counted. rangebound at 1.3850, steady at 1.5780. CAN two-year -3bps at 2.55%, 10-year -1.5bps at 3.155%.

— Day ahead: U.S. JOLTS, consumer confidence. European Central Bank consumer price index expectations, speaker Cipollone. Bank of England's Ramsden. Hungary's central bank(MNB) forecast on hold.

— Nikkei +0.4%, EUR 10-year IRS -2bps at 2.47%, Brent crude -1.2% at $65.1/barrel, Gold -0.6% at $3315/oz.

It's a "coin flip" Wednesday at 9:45 a.m. ET for the Bank of Canada between a 25bps rate cut and a pause after headline inflation unexpectedly slowed to 2.3% year over year in March and core moderated to 2.8%, said Societe Generale.

Perhaps more crucial to the meeting is the Canadian government's decision to reduce the temperature in the trade war with the United States, wrote the bank in a note to clients. Canada will introduce six-month tariff relief on some U.S. goods. Some automakers will also be eligible for exemptions.

This would diminish the hit to business confidence and so at the margin favors no change by the BoC, stated SocGen. The policy rate has been lowered in recent months and is currently 2.75%, the midpoint of the neutral range.

Those rate cuts are still working their way through the economy, and with trading back below 1.40, the BoC may opt to keep its powder dry, added the bank. The complexity of the trade shock and uncertainty around the outlook mean that forward guidance will probably be given another miss.

Growth and inflation forecasts will be updated in the BoC's Monetary Policy Report for the first time since January. Economists surveyed by Bloomberg are split almost 50/50 on a 25bps cut to 2.50% or a pause, noted SocGen.

is facing resistance from 200dma at 1.4000/1.4025, support is located at 1.3825, according to the bank. is rebounding from an interim low of 1.5670, the next hurdles are at 1.5930/1.5970.

With global and foreign exchange markets focusing strongly on United States protectionism, the Canadian dollar (CAD or loonie) and euro (EUR) are among the most impacted currencies, said Societe Generale.

U.S. President Donald Trump has targeted trade with Canada from the outset and the U.S. is now set to impose tariffs on eurozone steel and aluminum imports, wrote the bank in a note to clients. This backdrop should keep both the EUR and CAD under pressure in the coming months, helping keep in its range since fall 2023.

CAD turbulence since the start of the year has pushed up realized volatility, stated SocGen. However, the risk premium in implied volatilities persists, so the bank sees value in selling it by taking savvy risks.

Instead of selling gamma or naked options, SocGen prefers selling volumes via a double-no-touch (DNT) option, taking advantage of the spot range to generate attractive leverage.

A DNT option is a type of option that gives the holder a specified payout only if the underlying asset price remains within a specified range until expiration

The foreign exchange rate has been trading within SocGen's DNT bounds since October 2023. The bank expects it to remain in this range for at least one more semester, as the FX market should remain US dollar-driven, with a strong focus on trade tensions and U.S. policies.

Investors buying a DNT option cannot lose more than the premium initially paid. However, the option will cease to exist if hits either 1.4450 or 1.5250 at any time before expiry.

A common theme among foreign exchange strategists is that has recently been undershooting levels normally suggested by short-term rate differentials, said ING.

The common theme among them is that most are saying rate differentials should justify closer to 1.05, wrote the bank in a note.

Wednesday provided a great opportunity for to rally, stated ING. Two-year rate spreads narrowed by 5bps on the 0.2% reading on core United States consumer price index. Yet struggled to hold the rally to 1.0350.

Not very impressive and perhaps represents a conviction view that the eurozone and the euro will underperform this year on weak growth and weak leadership in the region, pointed out the bank.

ING also notes that current speculative short positioning seems much more extreme in currencies like the Canadian (CAD), Australian (AUD) and New Zealand (NZD) dollars than it does in the euro. This suggests that , and could all come lower if U.S. President-elect Donald Trump doesn't deliver as aggressive a tariff package as some expect next week.

The strong US dollar setting could push back to 1.0225/50 on Thursday. However, the bank suspects that some buying may emerge there as investors lighten positions ahead of Monday's event risk.

Central and Eastern European markets saw "significant" relief after U.S. inflation numbers on Wednesday, resulting in a strong rally in the rates and bond markets, added ING. The foreign exchange market was more muted but still touched 410 for a while, the lowest level this year.

Implications for the days ahead are more mixed though. The bank saw a further tightening of rate differentials in Poland and the Czech Republic, implying weaker foreign exchange.

While closed some of the gaps in the previous days, continues to diverge. For , ING keeps an upward bias, following the direction of the rates market. Poland is more complicated and dependent on Friday's tone from the central bank (NBP) governor.

If the tone remains hawkish like in December, the zloty (PLN) should stay supported, and the gap between rates and foreign exchange will close due to a sell-off in the rates market rather than the reverse, according to ING. However, the NBP has been unpredictable in recent months and could surprise.