Citi has recommended a short position in the U.S. dollar against the Canadian dollar, betting that stretched interest-rate differentials will reverse in favor of the loonie as upcoming data challenge U.S. monetary policy expectations. The bank initiated the trade at 1.3854 on Sept. 2, targeting 1.35, with a stop-loss at 1.3990. Citi expects the main driver to be the U.S. dollar leg, as incoming data may fail to justify a September Fed rate hike. U.S. inflation data due Sept. 11 is the key catalyst, with Citi economists expecting annual inflation to ease to 2.3%-2.4%. The Canadian dollar also gains support from a hawkish Bank of Canada stance, with Governor Tiff Macklem citing increased upside risks to inflation and readiness for consecutive hikes. Citi notes the market's pricing of the Fed-BoC rate differential is at the upper end of its yearly range, making it attractive to fade the move. Canada's first Investment Summit on Sept. 14-15 could provide additional support, and the trade also reduces exposure to oil-price moves.
Citigroup Inc.Citi expects USD to weaken as data may not justify Fed hike, while BoC hawkish stance supports CAD.
