Citigroup has initiated a short position on the U.S. dollar against the Canadian dollar (USD/CAD), entering the trade at 1.3854 on Sept. 2 with a target of 1.35 and a stop-loss at 1.3990.
The move reflects expectations that incoming U.S. inflation data will fail to justify a Federal Reserve rate hike in September. Citi economists project annual U.S. inflation to ease to 2.3%-2.4%, aligning with recent Fed minutes that signal continued disinflation through year-end. The bank cited the removal of the Fed’s hawkish premium as a key driver for the position.
The Canadian dollar is supported by a more hawkish-than-expected stance from the Bank of Canada. Governor Tiff Macklem noted that upside risks to inflation have increased, and the central bank remains prepared to deliver consecutive rate hikes if necessary. Macklem also downplayed the potential growth impact of proposed U.S. tariffs, reinforcing the BoC’s hawkish posture.
Market pricing of the Fed-BoC rate differential is currently at the upper end of its 2024 range, making it an opportune time to fade recent USD strength against CAD. Additionally, Canada’s Investment Summit, scheduled for Sept. 14-15, could bring announcements related to investment flows or increased FX hedging demand, further supporting the Canadian dollar.
The trade also allows Citi to reduce exposure to oil-price volatility, which can influence both currencies amid renewed geopolitical tensions between the U.S. and Iran. The position targets a removal of the Fed’s hawkish bias while capitalizing on the BoC’s comparatively tighter policy stance.
