UBS Wealth Management is reducing its overweight position in the Canadian dollar as it has not appreciated as much as expected, despite mounting global trade tensions.

UBS Wealth Management said it would reduce its long CAD position and reduce its short USD position.

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Geoffrey Yu, head of the UK Chief investment office at UBS Wealth Management, said: “We change our FX strategy by reducing our short USD position further. In our view, the near-term risk balance has turned against holding a long Canadian dollar position.”

Yu added that when the long CAD, short USD position was set it, UBS expected the Canadian economy to benefit from US growth and to develop in a way that rate hikes become more imminent, despite the trade frictions between the US and Canada.

Yu said: “But the US administration’s threat of more tariffs in recent weeks has shown that politics currently trump economics in the currency market.

The Swiss private bank had opened the position in November last year and said it “enjoyed solid performance until January.”

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UBS Wealth Management still considers CAD an attractive investment, but thinks that escalation of political uncertainty has led to increased short-term risk.

UBS Wealth Management said US dollar weakness will persist and therefore sees a long position in the Japanese yen, and a short USD position as the way forward to minimise risk.

This comes amid an improving Japanese economy prompting the Bank of Japan (BoJ) to reduce its expansionary stance.

Yu said: “Our long JPY position versus the USD has still several positive aspects, in particular in a portfolio context.”

Other key highlights of the research note include:

  • Trade frictions between the US and its partners will remain
  • Smaller countries will be more affected than large countries
  • Export champions are at a disadvantage
  • “This is not a global trade war, it is a US trade campaign.

Yu said: “Assessing these four theses, we think it is reasonable to maintain our forecast profile for a strengthening of the EUR and the JPY. Economic recovery might be slower than we projected at the end of last year, but we believe our six-month EURUSD forecast of 1.25, which is also our year-end forecast, seems to be a reasonable target right now.

Yu added: “This view is predicated on an improvement of European data releases showing that the current growth weakness is temporary.”