The prolonged US dollar uptrend has been dented by the decision of the Trump administration to delay tariffs on Canada and Mexico, but Bank of America Securities sees this as creating new opportunities.
At 09:30 ET (14:30 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.4% lower to 107.380, falling back from the three-week high seen at the start of the week.
This weakness followed the decision of US President Donald Trump to put on ice US tariffs on both Canada and Mexico earlier in the week, leaving many foreign exchange traders to believe a similar rapprochement between Beijing and Washington could be achieved.
This resulted in the USD/CAD pair falling around 1% over the last week, hitting its trigger level on the way down where its uptrend is neutralized, said Bank of America – the pair is still up well over 5% over the course of the last year.
Accordingly, the bank thinks trend followers may have started to reduce their short Canadian dollar positions as the uptrend is at risk of turning sideways.
“Squaring of stretched short CAD positions among trend followers may have contributed to the recent sharp CAD rally. From here we see limited relief rally for CAD in the near-term as trade uncertainty persists,” analysts at Bank of America Securities said, in a note dated Feb. 5.
However, the bank sees potential rotating out of any Canadian dollar weakness into the EUR/JPY downtrend.
“We expect trend followers to continue chasing EURJPY lower where the downtrend has more room to add. If a new round of eurozone tariffs materializes, material risk-off could see the pair retest its December 2024 low of 156.18.”
EUR/JPY last traded 0.4% lower to ¥159.49.
