We admire the zeal and enthusiasm of Citi's Steven Englander who, like a modern-day Don Quixote, has, courtesy of his long-term bearish EIR call, taken on not only the Fed, but the PBoC windmill as well, which as has been confirmed, is an official buyer of the doomed European currency. This time, instead of reiterating his short EURUSD call, he advises clients to short EURCAD with a 1.3050 price target and a 1.4160 stop loss. The call summary: "We add a new trade to the G10 FX Strategy trade idea portfolio: short EURCAD spot at 1.3850 with a target of 1.3050 and a 1.4160 stop loss. Euro zone downside risks have increased as peripheral debt issues have intensified and spread with the euro zone. Light positioning in CAD and substantial pessimism toward US economic data means that CAD will benefit from positive US and Canadian economic surprises in coming weeks."
Full Citi note:
Short EURCAD on peripheral risks and ahead of Canadian, US data
Lingering uncertainty about the periphery should remain a drag on the EUR, especially against the G10 smalls such as the scandis and CAD. This is likely to remain the case for as long as concerns about the periphery do not mutate into fears about global growth. Short EURCAD positions could prove increasingly attractive as we move closer towards the key events in the latter part of the week – the ECB monetary policy meeting on Thursday, labor market data out of the US on Thursday and Friday, and the Canadian employment report on Friday.
We think that CAD could benefit from positive labor market surprises out of the US for two reasons. First, given the close economic linkages between the US and Canada, indications of greater resilience in the US could be supportive for CAD. Second, positive economic surprises could also help support market risk sentiment and support risk-correlated currencies like CAD.
Further, the latest CFTC data showed that leveraged investors remained net short CAD into the beginning of last week and we suspect that long CAD positioning among the broader set of investors remains light relative to both historical levels and to other risk correlated currencies. Our economists remain constructive on upcoming Canadian economic data and we expect that the potential for further CAD strength is high if data continues to surprise to the upside in a similar manner to the Building Permits release earlier this morning.
The potential upside risk to EURCAD is a surprise shot of hawkishness from the ECB tomorrow. If the ECB signals greater optimism about the euro zone economy, the EUR could be supported across the board. This is far from our central scenario. Even if this is the case, we suspect that a more constructive outlook on the euro and, by implication, global growth, by the ECB could be supportive for commodity currencies like CAD. We would therefore think that the upside risk for EURCAD is limited.