Markets underprice US-Canada trade risks?

Deutsche Bank thinks markets may be underestimating the risk of a trade war between the US and Canada.

In its analysis, the bank suggests that USD/CAD could rise to "at least" 1.53, with the potential to test the 2002 all-time high of 1.61. A trade war could push Canada into a recession, prompting the Bank of Canada to cut interest rates to as low as 1.50%, significantly below the 2.75% currently priced in by markets.

The Trump administration’s relationship with Canada may set a baseline for its broader trade policies, indicating that the potential impact on other trading partners' currencies might currently be underestimated by the market too. EUR/USD comes to mind in this regard.

Currently, USD/CAD has been trading within a tight range of 1.4260–1.4465 for over a month. The pair maintains a bullish outlook, supported by a rising 50-day Exponential Moving Average (EMA), which is currently around 1.4235.