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AUD USD - FUNDAMENTAL DRIVERSAUD FUNDAMENTAL BIAS: BULLISH 1. Monetary Policy At the May policy decision, the RBA made a hawkish turn by raising the cash rate by 0.25% versus STIR expectations of a 15bsp move. Even though there were some hawkish takes looking for a 40bsp move, the 25bsp was still higher than consensus expectations. The bank noted that inflation pressures have risen more than they expected, even without a sharp rise in wages, and means that further increases in the cash rate will be required to bring inflation back in line with their target. They also surprised markets on the balance sheet side by announcing that they are starting passive QT by stopping the reinvestment of maturing bonds. The hawkish surprise was enough to see STIR markets price in >60% chance of a 50bsp hike for the June meeting despite comments from Gov Lowe who said they don’t preclude a bigger or smaller rate move than 25bsp in the future. All-in-all the decision from the RBA was hawkish and has finally kick started the bank’s hiking cycle and should provide support for the AUD in the med-term as long as the bank keeps tightening expectations intact. 2. Idiosyncratic Drivers & Intermarket Analysis Apart from the RBA, there are 3 drivers we’re watching for the med-term outlook: Recovery – unlike other nations where growth & inflation is expected to slow, Australia is expected to see recovery, mostly thanks to stimulus in China China – With the PBoC & CCP stepping up monetary and fiscal stimulus, any recovery in China bodes well for Australia (China accounts for 40% of Australian exports). It also means the current virus situation in China posesshort-term downside risks for AUD. The AUKUS defence pact could see retaliation against Aussie goods and is worth keeping on the radar as well Commodities – Iron Ore (31%), Coal (14%) and LNG (10%) is more than 50% of Aussie exports, with rising prices giving the AUD huge support from terms of trade. If commodities remain supported it remains a support for AUD, but of course also means any sizeable corrections would weigh on the AUD, which means geopolitical and China demand developments remain focus points. 3. Global Risk Outlook As a high-beta currency, the AUD usually benefits from overall positive risk sentiment as well as environments that benefit pro-cyclical assets. Thus, both short-term (immediate) and med-term (underlying) risk sentiment will always be a key consideration for the AUD. 4. CFTC Analysis Very similar positioning change with Leverage Funds trimming net-shorts by a big amount but Asset Managers increasing net-short contracts by another big amount. With AUD aggregate positioning no longer stretched and mixed signals from CFTC categories, the CFTC data does not provide much in terms of signals for AUD. 5. The Week Ahead With a quiet week ahead the main focus for the AUD will be on China developments, commodities and risk sentiment. On the China side, the market’s attention will turn to Covid developments. Even though we don’t think the Covid challenges changes the med-term outlook for China’s recovery, it has certainly pushed it back, and last week’s PMI data was much worse than expected. Any major negative Covid developments can place further pressure on the AUD, while further stimulus measures out of China would be seen as a positive. For commodities , Iron Ore is a key focus for the week ahead. Even though Iron Ore has held up very well in recent weeks despite China’s Covid predicament, this week saw Iron Ore break through key support and ending the week close to 5% down. If this downside pressure in Iron Ore continues it will be a negative driver for the AUD. Furthermore, the classic risk sentiment correlation has come back with a vengeance these past three weeks, which means overall risk sentiment and equity price action will also be in might be in the limelight for the AUD. USD FUNDAMENTAL BIAS: BULLISH 1. Monetary Policy At the May meeting, the Fed delivered on hawkish expectations regarding rates by hiking the Fed Funds Rate by 50bsp and also confirmed that the committee expects further 50bsp hikes to be appropriate. The fed also stuck to a familiar hawkish tone by downplaying the prospects of an imminent recession by explaining that even though the economy contracted in Q1, that household spending and business investment remained strong. The Chair also stuck to their guns regarding the rate path by suggesting that they think reaching neutral (currently estimated at 2.4%) before year-end would be appropriate and will assess the need for further hikes when they get there. There were however some less hawkish elements which saw a very classic ‘sell-the-fact’ reaction in major asset classes. The first one was on the Quantitative Tightening front where the bank decided on a phased approach for balance sheet reduction by starting the monthly caps at 30bn (treasuries) and 17.5bn ( MBS ) and pushing it up to the expected $60bn (treasuries) and $35bn ( MBS ) over a three-month timeframe. The second less hawkish element was comments from Chair Powell who took 75bsp hikes off the table saying the committee was not actively considering rate moves of that size. Interestingly, it seems STIR markets did not really believe the Fed as the probability of a 75bsp hike stood at >70% directly following the presser. All-in-all, the meeting provided a short-term ‘sell-the-fact’ opportunity, but also cemented the view that despite signs of a slowing economy and despite clear stress in financial markets, the Fed is sticking to their aggressive tightening for now. 2. Global & Domestic Economy As the reserve currency, the USD’s global usage means it’s usually inversely correlated to the global economy and global trade. The USD usually appreciates when growth & inflation slows (disinflation) and depreciates when growth & inflation accelerates (reflation). Thus, current expectations of a cyclical slowdown are a positive driver for the Dollar. Incoming data will be watched in relation to the ‘Fed Put’ as there are many similarities between now and 4Q18, where the Fed were also tightened into a slowdown. If growth data slows and the Fed stays hawkish it’s a positive for the USD, however if the Fed pivots dovish that’ll be a negative driver for the USD. 3. CFTC Analysis Aggregate USD positioning remains close to 1 standard deviation above the mean, and close to prior tops where the USD topped out in previous cycles. That does not change the bullish outlook for the USD in the med-term but means that we would wait for pullbacks before initiating new longs with price at new cycle highs. 4. The Week Ahead In the week ahead, the market’s biggest attention for the USD will turn to April CPI data, Fed Speak and Consumer Sentiment data. Even though there have been some clear signs that growth is slowing in the US economy, the Fed has kept up with promises of aggressive tightening this year as inflation is more than 4 times above target. Consensus expects headline inflation to drop to 8.1% from the prior of 8.5% and for Core YY to drop to 6.0% from 6.5%. This is mainly driven by base effects as April 2021 marks the month when price pressures started to really ramp up in the US. After the previous surprise miss in Core CPI and PCE , a bigger-than-expected miss in CPI could spark further speculation about ‘peak inflation’. Thus, any print close to or below the market’s minimum expectations could see some downside pressure in the USD and US10Y , as both are trading very close to cycle highs. We will also unfortunately be inundated by Fed speak next week as various officials will be running for the microphone to voice their own opinion of the May policy decision. As usual their comments will be watched closely for any new information that was not shared in the statement or during the presser with the Chair. We’ll also have updated Consumer Sentiment data, which will be important to see whether the bounce we saw from the prior reading is followed up with another, or whether sentiment deteriorates further from already recession territory lows. As always, risk sentiment will also be a focus for the safe haven Dollar.
by thunderpips
AUD USD - FUNDAMENTAL DRIVERSAUD FUNDAMENTAL BIAS: BULLISH 1. Monetary Policy At the May policy decision, the RBA made a hawkish turn by raising the cash rate by 0.25% versus STIR expectations of a 15bsp move. Even though there were some hawkish takes looking for a 40bsp move, the 25bsp was still higher than consensus expectations. The bank noted that inflation pressures have risen more than they expected, even without a sharp rise in wages, and means that further increases in the cash rate will be required to bring inflation back in line with their target. They also surprised markets on the balance sheet side by announcing that they are starting passive QT by stopping the reinvestment of maturing bonds. The hawkish surprise was enough to see STIR markets price in >60% chance of a 50bsp hike for the June meeting despite comments from Gov Lowe who said they don’t preclude a bigger or smaller rate move than 25bsp in the future. All-in-all the decision from the RBA was hawkish and has finally kick started the bank’s hiking cycle and should provide support for the AUD in the med-term as long as the bank keeps tightening expectations intact. 2. Idiosyncratic Drivers & Intermarket Analysis Apart from the RBA, there are 3 drivers we’re watching for the med-term outlook: Recovery – unlike other nations where growth & inflation is expected to slow, Australia is expected to see recovery, mostly thanks to stimulus in China China – With the PBoC & CCP stepping up monetary and fiscal stimulus, any recovery in China bodes well for Australia (China accounts for 40% of Australian exports). It also means the current virus situation in China posesshort-term downside risks for AUD. The AUKUS defence pact could see retaliation against Aussie goods and is worth keeping on the radar as well Commodities – Iron Ore (31%), Coal (14%) and LNG (10%) is more than 50% of Aussie exports, with rising prices giving the AUD huge support from terms of trade. If commodities remain supported it remains a support for AUD, but of course also means any sizeable corrections would weigh on the AUD, which means geopolitical and China demand developments remain focus points. 3. Global Risk Outlook As a high-beta currency, the AUD usually benefits from overall positive risk sentiment as well as environments that benefit pro-cyclical assets. Thus, both short-term (immediate) and med-term (underlying) risk sentiment will always be a key consideration for the AUD. 4. CFTC Analysis Very similar positioning change with Leverage Funds trimming net-shorts by a big amount but Asset Managers increasing net-short contracts by another big amount. With AUD aggregate positioning no longer stretched and mixed signals from CFTC categories, the CFTC data does not provide much in terms of signals for AUD. 5. The Week Ahead With a quiet week ahead the main focus for the AUD will be on China developments, commodities and risk sentiment. On the China side, the market’s attention will turn to Covid developments. Even though we don’t think the Covid challenges changes the med-term outlook for China’s recovery, it has certainly pushed it back, and last week’s PMI data was much worse than expected. Any major negative Covid developments can place further pressure on the AUD, while further stimulus measures out of China would be seen as a positive. For commodities , Iron Ore is a key focus for the week ahead. Even though Iron Ore has held up very well in recent weeks despite China’s Covid predicament, this week saw Iron Ore break through key support and ending the week close to 5% down. If this downside pressure in Iron Ore continues it will be a negative driver for the AUD. Furthermore, the classic risk sentiment correlation has come back with a vengeance these past three weeks, which means overall risk sentiment and equity price action will also be in might be in the limelight for the AUD. USD FUNDAMENTAL BIAS: BULLISH 1. Monetary Policy At the May meeting, the Fed delivered on hawkish expectations regarding rates by hiking the Fed Funds Rate by 50bsp and also confirmed that the committee expects further 50bsp hikes to be appropriate. The fed also stuck to a familiar hawkish tone by downplaying the prospects of an imminent recession by explaining that even though the economy contracted in Q1, that household spending and business investment remained strong. The Chair also stuck to their guns regarding the rate path by suggesting that they think reaching neutral (currently estimated at 2.4%) before year-end would be appropriate and will assess the need for further hikes when they get there. There were however some less hawkish elements which saw a very classic ‘sell-the-fact’ reaction in major asset classes. The first one was on the Quantitative Tightening front where the bank decided on a phased approach for balance sheet reduction by starting the monthly caps at 30bn (treasuries) and 17.5bn ( MBS ) and pushing it up to the expected $60bn (treasuries) and $35bn ( MBS ) over a three-month timeframe. The second less hawkish element was comments from Chair Powell who took 75bsp hikes off the table saying the committee was not actively considering rate moves of that size. Interestingly, it seems STIR markets did not really believe the Fed as the probability of a 75bsp hike stood at >70% directly following the presser. All-in-all, the meeting provided a short-term ‘sell-the-fact’ opportunity, but also cemented the view that despite signs of a slowing economy and despite clear stress in financial markets, the Fed is sticking to their aggressive tightening for now. 2. Global & Domestic Economy As the reserve currency, the USD’s global usage means it’s usually inversely correlated to the global economy and global trade. The USD usually appreciates when growth & inflation slows (disinflation) and depreciates when growth & inflation accelerates (reflation). Thus, current expectations of a cyclical slowdown are a positive driver for the Dollar. Incoming data will be watched in relation to the ‘Fed Put’ as there are many similarities between now and 4Q18, where the Fed were also tightened into a slowdown. If growth data slows and the Fed stays hawkish it’s a positive for the USD, however if the Fed pivots dovish that’ll be a negative driver for the USD. 3. CFTC Analysis Aggregate USD positioning remains close to 1 standard deviation above the mean, and close to prior tops where the USD topped out in previous cycles. That does not change the bullish outlook for the USD in the med-term but means that we would wait for pullbacks before initiating new longs with price at new cycle highs. 4. The Week Ahead In the week ahead, the market’s biggest attention for the USD will turn to April CPI data, Fed Speak and Consumer Sentiment data. Even though there have been some clear signs that growth is slowing in the US economy, the Fed has kept up with promises of aggressive tightening this year as inflation is more than 4 times above target. Consensus expects headline inflation to drop to 8.1% from the prior of 8.5% and for Core YY to drop to 6.0% from 6.5%. This is mainly driven by base effects as April 2021 marks the month when price pressures started to really ramp up in the US. After the previous surprise miss in Core CPI and PCE , a bigger-than-expected miss in CPI could spark further speculation about ‘peak inflation’. Thus, any print close to or below the market’s minimum expectations could see some downside pressure in the USD and US10Y , as both are trading very close to cycle highs. We will also unfortunately be inundated by Fed speak next week as various officials will be running for the microphone to voice their own opinion of the May policy decision. As usual their comments will be watched closely for any new information that was not shared in the statement or during the presser with the Chair. We’ll also have updated Consumer Sentiment data, which will be important to see whether the bounce we saw from the prior reading is followed up with another, or whether sentiment deteriorates further from already recession territory lows. As always, risk sentiment will also be a focus for the safe haven Dollar.
by thunderpips
AUD USD - FUNDAMENTAL DRIVERSAUD FUNDAMENTAL BIAS: BULLISH 1. Monetary Policy At the May policy decision, the RBA made a hawkish turn by raising the cash rate by 0.25% versus STIR expectations of a 15bsp move. Even though there were some hawkish takes looking for a 40bsp move, the 25bsp was still higher than consensus expectations. The bank noted that inflation pressures have risen more than they expected, even without a sharp rise in wages, and means that further increases in the cash rate will be required to bring inflation back in line with their target. They also surprised markets on the balance sheet side by announcing that they are starting passive QT by stopping the reinvestment of maturing bonds. The hawkish surprise was enough to see STIR markets price in >60% chance of a 50bsp hike for the June meeting despite comments from Gov Lowe who said they don’t preclude a bigger or smaller rate move than 25bsp in the future. All-in-all the decision from the RBA was hawkish and has finally kick started the bank’s hiking cycle and should provide support for the AUD in the med-term as long as the bank keeps tightening expectations intact. 2. Idiosyncratic Drivers & Intermarket Analysis Apart from the RBA, there are 3 drivers we’re watching for the med-term outlook: Recovery – unlike other nations where growth & inflation is expected to slow, Australia is expected to see recovery, mostly thanks to stimulus in China China – With the PBoC & CCP stepping up monetary and fiscal stimulus, any recovery in China bodes well for Australia (China accounts for 40% of Australian exports). It also means the current virus situation in China posesshort-term downside risks for AUD. The AUKUS defence pact could see retaliation against Aussie goods and is worth keeping on the radar as well Commodities – Iron Ore (31%), Coal (14%) and LNG (10%) is more than 50% of Aussie exports, with rising prices giving the AUD huge support from terms of trade. If commodities remain supported it remains a support for AUD, but of course also means any sizeable corrections would weigh on the AUD, which means geopolitical and China demand developments remain focus points. 3. Global Risk Outlook As a high-beta currency, the AUD usually benefits from overall positive risk sentiment as well as environments that benefit pro-cyclical assets. Thus, both short-term (immediate) and med-term (underlying) risk sentiment will always be a key consideration for the AUD. 4. CFTC Analysis Very similar positioning change with Leverage Funds trimming net-shorts by a big amount but Asset Managers increasing net-short contracts by another big amount. With AUD aggregate positioning no longer stretched and mixed signals from CFTC categories, the CFTC data does not provide much in terms of signals for AUD. 5. The Week Ahead With a quiet week ahead the main focus for the AUD will be on China developments, commodities and risk sentiment. On the China side, the market’s attention will turn to Covid developments. Even though we don’t think the Covid challenges changes the med-term outlook for China’s recovery, it has certainly pushed it back, and last week’s PMI data was much worse than expected. Any major negative Covid developments can place further pressure on the AUD, while further stimulus measures out of China would be seen as a positive. For commodities, Iron Ore is a key focus for the week ahead. Even though Iron Ore has held up very well in recent weeks despite China’s Covid predicament, this week saw Iron Ore break through key support and ending the week close to 5% down. If this downside pressure in Iron Ore continues it will be a negative driver for the AUD. Furthermore, the classic risk sentiment correlation has come back with a vengeance these past three weeks, which means overall risk sentiment and equity price action will also be in might be in the limelight for the AUD. USD FUNDAMENTAL BIAS: BULLISH 1. Monetary Policy At the May meeting, the Fed delivered on hawkish expectations regarding rates by hiking the Fed Funds Rate by 50bsp and also confirmed that the committee expects further 50bsp hikes to be appropriate. The fed also stuck to a familiar hawkish tone by downplaying the prospects of an imminent recession by explaining that even though the economy contracted in Q1, that household spending and business investment remained strong. The Chair also stuck to their guns regarding the rate path by suggesting that they think reaching neutral (currently estimated at 2.4%) before year-end would be appropriate and will assess the need for further hikes when they get there. There were however some less hawkish elements which saw a very classic ‘sell-the-fact’ reaction in major asset classes. The first one was on the Quantitative Tightening front where the bank decided on a phased approach for balance sheet reduction by starting the monthly caps at 30bn (treasuries) and 17.5bn (MBS) and pushing it up to the expected $60bn (treasuries) and $35bn (MBS) over a three-month timeframe. The second less hawkish element was comments from Chair Powell who took 75bsp hikes off the table saying the committee was not actively considering rate moves of that size. Interestingly, it seems STIR markets did not really believe the Fed as the probability of a 75bsp hike stood at >70% directly following the presser. All-in-all, the meeting provided a short-term ‘sell-the-fact’ opportunity, but also cemented the view that despite signs of a slowing economy and despite clear stress in financial markets, the Fed is sticking to their aggressive tightening for now. 2. Global & Domestic Economy As the reserve currency, the USD’s global usage means it’s usually inversely correlated to the global economy and global trade. The USD usually appreciates when growth & inflation slows (disinflation) and depreciates when growth & inflation accelerates (reflation). Thus, current expectations of a cyclical slowdown are a positive driver for the Dollar. Incoming data will be watched in relation to the ‘Fed Put’ as there are many similarities between now and 4Q18, where the Fed were also tightened into a slowdown. If growth data slows and the Fed stays hawkish it’s a positive for the USD, however if the Fed pivots dovish that’ll be a negative driver for the USD. 3. CFTC Analysis Aggregate USD positioning remains close to 1 standard deviation above the mean, and close to prior tops where the USD topped out in previous cycles. That does not change the bullish outlook for the USD in the med-term but means that we would wait for pullbacks before initiating new longs with price at new cycle highs. 4. The Week Ahead In the week ahead, the market’s biggest attention for the USD will turn to April CPI data, Fed Speak and Consumer Sentiment data. Even though there have been some clear signs that growth is slowing in the US economy, the Fed has kept up with promises of aggressive tightening this year as inflation is more than 4 times above target. Consensus expects headline inflation to drop to 8.1% from the prior of 8.5% and for Core YY to drop to 6.0% from 6.5%. This is mainly driven by base effects as April 2021 marks the month when price pressures started to really ramp up in the US. After the previous surprise miss in Core CPI and PCE, a bigger-than-expected miss in CPI could spark further speculation about ‘peak inflation’. Thus, any print close to or below the market’s minimum expectations could see some downside pressure in the USD and US10Y, as both are trading very close to cycle highs. We will also unfortunately be inundated by Fed speak next week as various officials will be running for the microphone to voice their own opinion of the May policy decision. As usual their comments will be watched closely for any new information that was not shared in the statement or during the presser with the Chair. We’ll also have updated Consumer Sentiment data, which will be important to see whether the bounce we saw from the prior reading is followed up with another, or whether sentiment deteriorates further from already recession territory lows. As always, risk sentiment will also be a focus for the safe haven Dollar.
by thunderpips
1
EURAUD: Trend-Following Trading Setup 🇪🇺🇦🇺 EURAUD is trading in a long-term bearish trend. After the price set a new low at the beginning of April, the pair started a correctional movement. It looks like bears are finally started to push: yesterday the price broke a strong horizontal demand cluster and a major rising trend line. Now I expect a bearish continuation to 1.44 level. ❤️If you have any questions, please, ask me in the comment section. Please, support my work with like, thank you!❤️
Short
by VasilyTrader
11
AUD CAD - FUNDAMENTAL DRIVERSAUD FUNDAMENTAL BIAS: BULLISH 1. Monetary Policy At their April meeting, the RBA took a slightly more hawkish stance by removing their reference to ‘patience’ in terms of policy tightening. With the bank taking a sanguine view of rising price pressures, the statement did reveal a growing concern for inflation with 10 references to ‘inflation’ in the statement. The bank explained that higher energy and commodity price could see a sizeable increase to inflation forecasts in the May report. In their Financial Stability report the bank urged borrowers to prepare for an increase in rates, which was a further signal from the bank. Even though the meeting showed a bank that is turning the page, the statement also revealed very similar conditionality such as incoming wage and inflation data. Following the meeting, markets have a bit of an overreaction by pricing in a >80% chance of a rate hike at the May meeting but was later pushed back to <30%. Given the importance of wage data, and since that is only release on the 18th of May, the most likely meeting for a first hike is the June meeting. Westpac investment bank agrees with our take with the bank expecting a 15bsp lift off in June, followed by 25bsp hikes in July, August, Oct and Nov. Even though this confirms our fundamental bullish bias, the >14 hikes priced by end 2023 means risks of lower repricing is building. 2. Idiosyncratic Drivers & Intermarket Analysis Apart from the RBA, there are 3 drivers we’re watching for the med-term outlook: Recovery – unlike other nations where growth & inflation is expected to slow, Australia is expected to see recovery, mostly thanks to stimulus in China China – With the PBoC & CCP stepping up monetary and fiscal stimulus, any recovery in China bodes well for Australia (China accounts for 40% of Australian exports). It also means the current virus situation in China posesshort-term downside risks for AUD. The AUKUS defence pact could see retaliation against Aussie goods and is worth keeping on the radar as well Commodities – Iron Ore (31%), Coal (14%) and LNG (10%) is more than 50% of Aussie exports, with rising prices giving the AUD huge support from terms of trade. If commodities remain supported it remains a support for AUD, but of course also means any sizeable corrections would weigh on the AUD, which means geopolitical and China demand developments remain focus points. 3. Global Risk Outlook As a high-beta currency, the AUD usually benefits from overall positive risk sentiment as well as environments that benefit pro-cyclical assets. Thus, both short-term (immediate) and med-term (underlying) risk sentiment will always be a key consideration for the AUD. 4. CFTC Analysis Quite strange positioning change for the AUD with Leverage Funds trimming net-shorts by a chunky amount but Asset Managers showing a whopping build up in net-short contracts. The shift in Asset Manager positioning could explain the reluctance of the AUD to make any real progress despite very positive China developments. CAD FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy The BoC delivered on expectations with a 50bsp hike as well as announcing a start to passive QT from the end of April by ending its reinvestment of maturing bonds. The bank upgraded both inflation and growth estimates as markets were expecting but did play a hawkish card by also increasing their neutral rate estimate to 2.5% from 2.25%. They acknowledged the growing risks from the current geopolitical situation but made it very clear that they are concerned about inflation and their hike of 50bsp showed that they think that policy needs to be normalized quickly (which some took as a hint that another 50bsp is on the way). The bank didn’t offer any additional clarity on QT but did note that they are not considering active QT of selling bonds just yet. Some conditionality also surfaced, where they explained that any sudden negative shocks to growth or inflation could see them pause hikes once they get closer towards neutral ( Gov Macklem also added that they might need to get rates slightly above neutral in the current cycle). Overall, it was a more hawkish than expected BoC decision, but interesting to note that STIR markets did not price in another 50bsp following the meeting (only a 25bsp) hike. We remain of the opinion that we are close to peak hawkishness for the BoC and are looking for the last push higher in the CAD for opportunities to sell. 2. Intermarket Analysis Considerations Oil’s impressive post-covid recovery has been driven by many factors such as supply & demand , global demand recovery, and more recently geopolitical concerns. At current prices the risk to demand destruction and stagflation is high, which means we remain cautious of oil in the med-term . Reason for caution: Synchronised policy tightening targeting demand, slowing growth, consensus longs, steep backwardation curve, heightened implied volatility . We remain cautious oil , but geopolitics are a key driver and focus for Petro-currencies like the CAD (even though the CAD-Oil correlation has been hit and miss). The upcoming week has a new round of OPEC meetings where the cartel is once again expected to stick to their plans to up output by 430K BPD per month. It will be interesting though to see whether recent lockdowns in China, and possible oil embargo news from the EU impacts the OPEC discussions, if at all. 3. Global Risk Outlook As a high-beta currency, the CAD usually benefits from overall positive risk sentiment as well as environments that benefit pro-cyclical assets. Thus, both short-term (immediate) and med-term (underlying) risk sentiment will always be a key consideration for the CAD. 4. CFTC Analysis Very little change in CFTC data for the CAD. We think markets are setting up a similar path compared to April 2021, Oct 2021 and Jan 2022 where markets were too aggressive to price in CAD upside only to see majority of it unwind later. As always though, timing those shorts will be very important. 5. The Week Ahead The highlight for the week ahead will be the jobs data scheduled for Friday, as well as oil market developments and risk sentiment. On the jobs data, this will be an interesting test for the Canadian labour market which have held up really well after bouncing back from the Omicron hick up. Even though we think the growth outlook for Canada is too optimistic, it might be too early to start seeing those growth concerns trickle into the jobs market as it is usually a late cycle indicator. However, in the event of a miss or a beat it might not change much in terms for the BoC just yet but given the frothy CAD price action a surprise miss could kickstart some overdue downside. Even though the correlation to oil has been rather hit and miss over the past few weeks, it’s always important to keep oil developments in mind, which means next week’s OPEC+ meetings could be an important event for Petro-currencies, especially with the possibility of oil embargo news from the EU as well. Then we also have risk sentiment to watch as the classic risk sensitivity that one would usually expect from high beta currencies like the AUD, CAD and NZD have seemingly returned with a vengeance in the past two trading weeks. That means overall risk sentiment will be an important driver to keep in mind for the CAD as well.
by thunderpips
AUD USD - FUNDAMENTAL DRIVERSAUD FUNDAMENTAL BIAS: BULLISH 1. Monetary Policy At their April meeting, the RBA took a slightly more hawkish stance by removing their reference to ‘patience’ in terms of policy tightening. With the bank taking a sanguine view of rising price pressures, the statement did reveal a growing concern for inflation with 10 references to ‘inflation’ in the statement. The bank explained that higher energy and commodity price could see a sizeable increase to inflation forecasts in the May report. In their Financial Stability report the bank urged borrowers to prepare for an increase in rates, which was a further signal from the bank. Even though the meeting showed a bank that is turning the page, the statement also revealed very similar conditionality such as incoming wage and inflation data. Following the meeting, markets have a bit of an overreaction by pricing in a >80% chance of a rate hike at the May meeting but was later pushed back to <30%. Given the importance of wage data, and since that is only release on the 18th of May, the most likely meeting for a first hike is the June meeting. Westpac investment bank agrees with our take with the bank expecting a 15bsp lift off in June, followed by 25bsp hikes in July, August, Oct and Nov. Even though this confirms our fundamental bullish bias, the >14 hikes priced by end 2023 means risks of lower repricing is building. 2. Idiosyncratic Drivers & Intermarket Analysis Apart from the RBA, there are 3 drivers we’re watching for the med-term outlook: Recovery – unlike other nations where growth & inflation is expected to slow, Australia is expected to see recovery, mostly thanks to stimulus in China China – With the PBoC & CCP stepping up monetary and fiscal stimulus, any recovery in China bodes well for Australia (China accounts for 40% of Australian exports). It also means the current virus situation in China posesshort-term downside risks for AUD. The AUKUS defence pact could see retaliation against Aussie goods and is worth keeping on the radar as well Commodities – Iron Ore (31%), Coal (14%) and LNG (10%) is more than 50% of Aussie exports, with rising prices giving the AUD huge support from terms of trade. If commodities remain supported it remains a support for AUD, but of course also means any sizeable corrections would weigh on the AUD, which means geopolitical and China demand developments remain focus points. 3. Global Risk Outlook As a high-beta currency, the AUD usually benefits from overall positive risk sentiment as well as environments that benefit pro-cyclical assets. Thus, both short-term (immediate) and med-term (underlying) risk sentiment will always be a key consideration for the AUD. 4. CFTC Analysis Quite strange positioning change for the AUD with Leverage Funds trimming net-shorts by a chunky amount but Asset Managers showing a whopping build up in net-short contracts. The shift in Asset Manager positioning could explain the reluctance of the AUD to make any real progress despite very positive China developments. USD FUNDAMENTAL BIAS: BULLISH 1. Monetary Policy In March the Fed delivered on a 25bsp hike as expected with Fed’s Bullard the only dissenter voting for a 50bsp hike. The Dot Plot saw a big upgrade from 3 hikes (Dec) to 7 hikes for 2022, with the FFR seen reaching 2.75%- 3.0% in 2023 before falling in 2024. They did however lower their neutral rate from 2.5% to 2.4% which were a negative. Inflation forecasts for 2022 were raised to 4.1% (previous 2.7%) but med-term inflation saw less aggressive upgrades. Even though the overall message and projections were hawkish, the fact that GDP estimates were lowered to 2.8% from 4.0% shows the Fed expects their actions to impact demand and also reflect some of the recent geopolitical uncertainties. The Fed didn’t share new details on QT but noted that the decision to start selling assets will be made at a coming meeting (markets consensus sees a July start as likely) and added that good progress in QT discussions means a May announcement is likely. During the presser the Chair expressed his view that the economy is doing really well and, should be more than able to withstand the incoming rate hikes (a very similar situation like we had in 4Q18). When asked whether 50bsp hikes could be on the table, the chair explained that the FOMC has not made decision to front-load hikes and will keep an eye on incoming inflation data to determine their policy actions going forward, but of course added that every incoming meeting was live. Overall, the Fed was hawkish, but due to very strong pre-positioning and close to peak hawkishness priced for STIR markets the meeting saw a ‘sell-the-fact’ reaction across major asset classes. 2. Global & Domestic Economy As the reserve currency, the USD’s global usage means it’s usually inversely correlated to the global economy and global trade. The USD usually appreciates when growth & inflation slows (disinflation) and depreciates when growth & inflation accelerates (reflation). Thus, current expectations of a cyclical slowdown are a positive driver for the Dollar. Incoming data will be watched in relation to the ‘Fed Put’ as there are many similarities between now and 4Q18, where the Fed were also tightened into a slowdown. If growth data slows and the Fed stays hawkish it’s a positive for the USD, however if the Fed pivots dovish that’ll be a negative driver for the USD. 3. CFTC Analysis Aggregate USD positioning remains close to 1 standard deviation above the mean, and close to prior tops where the USD topped out in previous cycles. That does not change the bullish outlook for the USD in the med-term but means that we would wait for pullbacks before initiating new longs with price at new cycle highs.
by thunderpips
AUD CAD - FUNDAMENTAL DRIVERSAUD FUNDAMENTAL BIAS: BULLISH 1. Monetary Policy At their April meeting, the RBA took a slightly more hawkish stance by removing their reference to ‘patience’ in terms of policy tightening. With the bank taking a sanguine view of rising price pressures, the statement did reveal a growing concern for inflation with 10 references to ‘inflation’ in the statement. The bank explained that higher energy and commodity price could see a sizeable increase to inflation forecasts in the May report. In their Financial Stability report the bank urged borrowers to prepare for an increase in rates, which was a further signal from the bank. Even though the meeting showed a bank that is turning the page, the statement also revealed very similar conditionality such as incoming wage and inflation data. Following the meeting, markets have a bit of an overreaction by pricing in a >80% chance of a rate hike at the May meeting but was later pushed back to <30%. Given the importance of wage data, and since that is only release on the 18th of May, the most likely meeting for a first hike is the June meeting. Westpac investment bank agrees with our take with the bank expecting a 15bsp lift off in June, followed by 25bsp hikes in July, August, Oct and Nov. Even though this confirms our fundamental bullish bias, the >14 hikes priced by end 2023 means risks of lower repricing is building. 2. Idiosyncratic Drivers & Intermarket Analysis Apart from the RBA, there are 3 drivers we’re watching for the med-term outlook: Recovery – unlike other nations where growth & inflation is expected to slow, Australia is expected to see recovery, mostly thanks to stimulus in China China – With the PBoC & CCP stepping up monetary and fiscal stimulus, any recovery in China bodes well for Australia (China accounts for 40% of Australian exports). It also means the current virus situation in China posesshort-term downside risks for AUD. The AUKUS defence pact could see retaliation against Aussie goods and is worth keeping on the radar as well Commodities – Iron Ore (31%), Coal (14%) and LNG (10%) is more than 50% of Aussie exports, with rising prices giving the AUD huge support from terms of trade. If commodities remain supported it remains a support for AUD, but of course also means any sizeable corrections would weigh on the AUD, which means geopolitical and China demand developments remain focus points. 3. Global Risk Outlook As a high-beta currency, the AUD usually benefits from overall positive risk sentiment as well as environments that benefit pro-cyclical assets. Thus, both short-term (immediate) and med-term (underlying) risk sentiment will always be a key consideration for the AUD. 4. CFTC Analysis Quite strange positioning change for the AUD with Leverage Funds trimming net-shorts by a chunky amount but Asset Managers showing a whopping build up in net-short contracts. The shift in Asset Manager positioning could explain the reluctance of the AUD to make any real progress despite very positive China developments. CAD FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy The BoC delivered on expectations with a 50bsp hike as well as announcing a start to passive QT from the end of April by ending its reinvestment of maturing bonds. The bank upgraded both inflation and growth estimates as markets were expecting but did play a hawkish card by also increasing their neutral rate estimate to 2.5% from 2.25%. They acknowledged the growing risks from the current geopolitical situation but made it very clear that they are concerned about inflation and their hike of 50bsp showed that they think that policy needs to be normalized quickly (which some took as a hint that another 50bsp is on the way). The bank didn’t offer any additional clarity on QT but did note that they are not considering active QT of selling bonds just yet. Some conditionality also surfaced, where they explained that any sudden negative shocks to growth or inflation could see them pause hikes once they get closer towards neutral ( Gov Macklem also added that they might need to get rates slightly above neutral in the current cycle). Overall, it was a more hawkish than expected BoC decision, but interesting to note that STIR markets did not price in another 50bsp following the meeting (only a 25bsp) hike. We remain of the opinion that we are close to peak hawkishness for the BoC and are looking for the last push higher in the CAD for opportunities to sell. 2. Intermarket Analysis Considerations Oil’s impressive post-covid recovery has been driven by many factors such as supply & demand , global demand recovery, and more recently geopolitical concerns. At current prices the risk to demand destruction and stagflation is high, which means we remain cautious of oil in the med-term . Reason for caution: Synchronised policy tightening targeting demand, slowing growth, consensus longs, steep backwardation curve, heightened implied volatility . We remain cautious oil , but geopolitics are a key driver and focus for Petro-currencies like the CAD (even though the CAD-Oil correlation has been hit and miss). The upcoming week has a new round of OPEC meetings where the cartel is once again expected to stick to their plans to up output by 430K BPD per month. It will be interesting though to see whether recent lockdowns in China, and possible oil embargo news from the EU impacts the OPEC discussions, if at all. 3. Global Risk Outlook As a high-beta currency, the CAD usually benefits from overall positive risk sentiment as well as environments that benefit pro-cyclical assets. Thus, both short-term (immediate) and med-term (underlying) risk sentiment will always be a key consideration for the CAD. 4. CFTC Analysis Very little change in CFTC data for the CAD. We think markets are setting up a similar path compared to April 2021, Oct 2021 and Jan 2022 where markets were too aggressive to price in CAD upside only to see majority of it unwind later. As always though, timing those shorts will be very important. 5. The Week Ahead The highlight for the week ahead will be the jobs data scheduled for Friday, as well as oil market developments and risk sentiment. On the jobs data, this will be an interesting test for the Canadian labour market which have held up really well after bouncing back from the Omicron hick up. Even though we think the growth outlook for Canada is too optimistic, it might be too early to start seeing those growth concerns trickle into the jobs market as it is usually a late cycle indicator. However, in the event of a miss or a beat it might not change much in terms for the BoC just yet but given the frothy CAD price action a surprise miss could kickstart some overdue downside. Even though the correlation to oil has been rather hit and miss over the past few weeks, it’s always important to keep oil developments in mind, which means next week’s OPEC+ meetings could be an important event for Petro-currencies, especially with the possibility of oil embargo news from the EU as well. Then we also have risk sentiment to watch as the classic risk sensitivity that one would usually expect from high beta currencies like the AUD, CAD and NZD have seemingly returned with a vengeance in the past two trading weeks. That means overall risk sentiment will be an important driver to keep in mind for the CAD as well.
by thunderpips
1
AUD USD - FUNDAMENTAL DRIVERSAUD FUNDAMENTAL BIAS: BULLISH 1. Monetary Policy At their April meeting, the RBA took a slightly more hawkish stance by removing their reference to ‘patience’ in terms of policy tightening. With the bank taking a sanguine view of rising price pressures, the statement did reveal a growing concern for inflation with 10 references to ‘inflation’ in the statement. The bank explained that higher energy and commodity price could see a sizeable increase to inflation forecasts in the May report. In their Financial Stability report the bank urged borrowers to prepare for an increase in rates, which was a further signal from the bank. Even though the meeting showed a bank that is turning the page, the statement also revealed very similar conditionality such as incoming wage and inflation data. Following the meeting, markets have a bit of an overreaction by pricing in a >80% chance of a rate hike at the May meeting but was later pushed back to <30%. Given the importance of wage data, and since that is only release on the 18th of May, the most likely meeting for a first hike is the June meeting. Westpac investment bank agrees with our take with the bank expecting a 15bsp lift off in June, followed by 25bsp hikes in July, August, Oct and Nov. Even though this confirms our fundamental bullish bias, the >14 hikes priced by end 2023 means risks of lower repricing is building. 2. Idiosyncratic Drivers & Intermarket Analysis Apart from the RBA, there are 3 drivers we’re watching for the med-term outlook: Recovery – unlike other nations where growth & inflation is expected to slow, Australia is expected to see recovery, mostly thanks to stimulus in China China – With the PBoC & CCP stepping up monetary and fiscal stimulus, any recovery in China bodes well for Australia (China accounts for 40% of Australian exports). It also means the current virus situation in China posesshort-term downside risks for AUD. The AUKUS defence pact could see retaliation against Aussie goods and is worth keeping on the radar as well Commodities – Iron Ore (31%), Coal (14%) and LNG (10%) is more than 50% of Aussie exports, with rising prices giving the AUD huge support from terms of trade. If commodities remain supported it remains a support for AUD, but of course also means any sizeable corrections would weigh on the AUD, which means geopolitical and China demand developments remain focus points. 3. Global Risk Outlook As a high-beta currency, the AUD usually benefits from overall positive risk sentiment as well as environments that benefit pro-cyclical assets. Thus, both short-term (immediate) and med-term (underlying) risk sentiment will always be a key consideration for the AUD. 4. CFTC Analysis Quite strange positioning change for the AUD with Leverage Funds trimming net-shorts by a chunky amount but Asset Managers showing a whopping build up in net-short contracts. The shift in Asset Manager positioning could explain the reluctance of the AUD to make any real progress despite very positive China developments. USD FUNDAMENTAL BIAS: BULLISH 1. Monetary Policy In March the Fed delivered on a 25bsp hike as expected with Fed’s Bullard the only dissenter voting for a 50bsp hike. The Dot Plot saw a big upgrade from 3 hikes (Dec) to 7 hikes for 2022, with the FFR seen reaching 2.75%- 3.0% in 2023 before falling in 2024. They did however lower their neutral rate from 2.5% to 2.4% which were a negative. Inflation forecasts for 2022 were raised to 4.1% (previous 2.7%) but med-term inflation saw less aggressive upgrades. Even though the overall message and projections were hawkish, the fact that GDP estimates were lowered to 2.8% from 4.0% shows the Fed expects their actions to impact demand and also reflect some of the recent geopolitical uncertainties. The Fed didn’t share new details on QT but noted that the decision to start selling assets will be made at a coming meeting (markets consensus sees a July start as likely) and added that good progress in QT discussions means a May announcement is likely. During the presser the Chair expressed his view that the economy is doing really well and, should be more than able to withstand the incoming rate hikes (a very similar situation like we had in 4Q18). When asked whether 50bsp hikes could be on the table, the chair explained that the FOMC has not made decision to front-load hikes and will keep an eye on incoming inflation data to determine their policy actions going forward, but of course added that every incoming meeting was live. Overall, the Fed was hawkish, but due to very strong pre-positioning and close to peak hawkishness priced for STIR markets the meeting saw a ‘sell-the-fact’ reaction across major asset classes. 2. Global & Domestic Economy As the reserve currency, the USD’s global usage means it’s usually inversely correlated to the global economy and global trade. The USD usually appreciates when growth & inflation slows (disinflation) and depreciates when growth & inflation accelerates (reflation). Thus, current expectations of a cyclical slowdown are a positive driver for the Dollar. Incoming data will be watched in relation to the ‘Fed Put’ as there are many similarities between now and 4Q18, where the Fed were also tightened into a slowdown. If growth data slows and the Fed stays hawkish it’s a positive for the USD, however if the Fed pivots dovish that’ll be a negative driver for the USD. 3. CFTC Analysis Aggregate USD positioning remains close to 1 standard deviation above the mean, and close to prior tops where the USD topped out in previous cycles. That does not change the bullish outlook for the USD in the med-term but means that we would wait for pullbacks before initiating new longs with price at new cycle highs. 4. The Week Ahead The main event for the week ahead will no doubt be the FOMC meeting, but we’ll also get ISM PMIs as well as the April jobs print coming our way. For the FOMC, we think the Fed has set themselves a very high hawkish bar going into the meeting. STIR markets are pricing in 3 back-to-back 50bsp hikes, as well as an earlier start to QT ($95bn p/m). On the language side, recent Fed speak has seen even the doves find their inner hawks by talking up very aggressive policy tightening. So, with all of that as the baseline going into the meeting, it means the Fed would need to hike 75bsp and up the expected QT pace to really surprise markets. With the USD and Yields at cycle highs and equities at cycle lows, that increases the chances of some sell-the-fact reactions. This would be our preferred strategy for the USD going into the week. Then we also have the data where the ISM PMI data will be closely watched for further clues of whether growth is slowing faster than expected. On the jobs side, the impact of the NFP will most likely be dictated by the outcome of the FOMC decision. If the Fed manages to surprise on the hawkish side (seems unlikely) a beat in jobs won’t do much to change that, but a miss can certainly do a lot to stir the pot (even more so if the Fed decision is interpreted as ‘less hawkish’.
by thunderpips
Today’s Notable Sentiment ShiftsAUD – The Australian dollar rallied on Tuesday after the RBA raised rates by more than expected and signalled further moves ahead, leading investors to wager on a faster tightening in the coming months. The central bank announced a 25 basis point rate hike, taking the Cash Rate to 0.35%, versus consensus for a 15 basis point rate hike, which would have taken the Cash Rate to 0.25%. Commenting on the announcement, NAB queried “does it mean that they will do 40 basis points in June, so we are up to 75 basis points? It is certainly possible. It looks like their narrative and the inflation forecasts that they’re hinting at comes across as fairly hawkish.”
by thunderpips
AUDCHF Neutral medium-term, 0.7465 long-term.The AUDCHF pair is currently holding the 1D MA50 (blue trend-line) as Support and in a similar sequence as the June - September 2020 pattern, it may turn sideways on the medium-term and consolidate. However, since the 0.618 Fibonacci retracement level has been broken, most likely it will maintain the bullish trend on the long-term. The next 1D MA200 (orange trend-line) contact, will most likely be the long-term buy signal. Our target is the 1.236 Fibonacci extension around 0.7465. -------------------------------------------------------------------------------------------------------- ** Please support this idea with your likes and comments, it is the best way to keep it relevant and support me. ** --------------------------------------------------------------------------------------------------------
by TradingShot
4
AUD USD - FUNDAMENTAL DRIVERSAUD FUNDAMENTAL BIAS: BULLISH 1. Monetary Policy At their April meeting, the RBA took a slightly more hawkish stance by removing their reference to ‘patience’ in terms of policy tightening. With the bank taking a sanguine view of rising price pressures, the statement did reveal a growing concern for inflation with 10 references to ‘inflation’ in the statement. The bank explained that higher energy and commodity price could see a sizeable increase to inflation forecasts in the May report. In their Financial Stability report the bank urged borrowers to prepare for an increase in rates, which was a further signal from the bank. Even though the meeting showed a bank that is turning the page, the statement also revealed very similar conditionality such as incoming wage and inflation data. Following the meeting, markets have a bit of an overreaction by pricing in a >80% chance of a rate hike at the May meeting but was later pushed back to <30%. Given the importance of wage data, and since that is only release on the 18th of May, the most likely meeting for a first hike is the June meeting. Westpac investment bank agrees with our take with the bank expecting a 15bsp lift off in June, followed by 25bsp hikes in July, August, Oct and Nov. Even though this confirms our fundamental bullish bias, the >14 hikes priced by end 2023 means risks of lower repricing is building. 2. Idiosyncratic Drivers & Intermarket Analysis Apart from the RBA, there are 3 drivers we’re watching for the med-term outlook: Recovery – unlike other nations where growth & inflation is expected to slow, Australia is expected to see recovery, mostly thanks to stimulus in China China – With the PBoC & CCP stepping up monetary and fiscal stimulus, any recovery in China bodes well for Australia (China accounts for 40% of Australian exports). It also means the current virus situation in China posesshort-term downside risks for AUD. The AUKUS defence pact could see retaliation against Aussie goods and is worth keeping on the radar as well Commodities – Iron Ore (31%), Coal (14%) and LNG (10%) is more than 50% of Aussie exports, with rising prices giving the AUD huge support from terms of trade. If commodities remain supported it remains a support for AUD, but of course also means any sizeable corrections would weigh on the AUD, which means geopolitical and China demand developments remain focus points. 3. Global Risk Outlook As a high-beta currency, the AUD usually benefits from overall positive risk sentiment as well as environments that benefit pro-cyclical assets. Thus, both short-term (immediate) and med-term (underlying) risk sentiment will always be a key consideration for the AUD. 4. CFTC Analysis Quite strange positioning change for the AUD with Leverage Funds trimming net-shorts by a chunky amount but Asset Managers showing a whopping build up in net-short contracts. The shift in Asset Manager positioning could explain the reluctance of the AUD to make any real progress despite very positive China developments. USD FUNDAMENTAL BIAS: BULLISH 1. Monetary Policy In March the Fed delivered on a 25bsp hike as expected with Fed’s Bullard the only dissenter voting for a 50bsp hike. The Dot Plot saw a big upgrade from 3 hikes (Dec) to 7 hikes for 2022, with the FFR seen reaching 2.75%- 3.0% in 2023 before falling in 2024. They did however lower their neutral rate from 2.5% to 2.4% which were a negative. Inflation forecasts for 2022 were raised to 4.1% (previous 2.7%) but med-term inflation saw less aggressive upgrades. Even though the overall message and projections were hawkish, the fact that GDP estimates were lowered to 2.8% from 4.0% shows the Fed expects their actions to impact demand and also reflect some of the recent geopolitical uncertainties. The Fed didn’t share new details on QT but noted that the decision to start selling assets will be made at a coming meeting (markets consensus sees a July start as likely) and added that good progress in QT discussions means a May announcement is likely. During the presser the Chair expressed his view that the economy is doing really well and, should be more than able to withstand the incoming rate hikes (a very similar situation like we had in 4Q18). When asked whether 50bsp hikes could be on the table, the chair explained that the FOMC has not made decision to front-load hikes and will keep an eye on incoming inflation data to determine their policy actions going forward, but of course added that every incoming meeting was live. Overall, the Fed was hawkish, but due to very strong pre-positioning and close to peak hawkishness priced for STIR markets the meeting saw a ‘sell-the-fact’ reaction across major asset classes. 2. Global & Domestic Economy As the reserve currency, the USD’s global usage means it’s usually inversely correlated to the global economy and global trade. The USD usually appreciates when growth & inflation slows (disinflation) and depreciates when growth & inflation accelerates (reflation). Thus, current expectations of a cyclical slowdown are a positive driver for the Dollar. Incoming data will be watched in relation to the ‘Fed Put’ as there are many similarities between now and 4Q18, where the Fed were also tightened into a slowdown. If growth data slows and the Fed stays hawkish it’s a positive for the USD, however if the Fed pivots dovish that’ll be a negative driver for the USD. 3. CFTC Analysis Aggregate USD positioning remains close to 1 standard deviation above the mean, and close to prior tops where the USD topped out in previous cycles. That does not change the bullish outlook for the USD in the med-term but means that we would wait for pullbacks before initiating new longs with price at new cycle highs. 4. The Week Ahead The main event for the week ahead will no doubt be the FOMC meeting, but we’ll also get ISM PMIs as well as the April jobs print coming our way. For the FOMC, we think the Fed has set themselves a very high hawkish bar going into the meeting. STIR markets are pricing in 3 back-to-back 50bsp hikes, as well as an earlier start to QT ($95bn p/m). On the language side, recent Fed speak has seen even the doves find their inner hawks by talking up very aggressive policy tightening. So, with all of that as the baseline going into the meeting, it means the Fed would need to hike 75bsp and up the expected QT pace to really surprise markets. With the USD and Yields at cycle highs and equities at cycle lows, that increases the chances of some sell-the-fact reactions. This would be our preferred strategy for the USD going into the week. Then we also have the data where the ISM PMI data will be closely watched for further clues of whether growth is slowing faster than expected. On the jobs side, the impact of the NFP will most likely be dictated by the outcome of the FOMC decision. If the Fed manages to surprise on the hawkish side (seems unlikely) a beat in jobs won’t do much to change that, but a miss can certainly do a lot to stir the pot (even more so if the Fed decision is interpreted as ‘less hawkish’.
by thunderpips
2
AUD CAD - FUNDAMENTAL DRIVERSAUD FUNDAMENTAL BIAS: BULLISH 1. Monetary Policy At their April meeting, the RBA took a slightly more hawkish stance by removing their reference to ‘patience’ in terms of policy tightening. With the bank taking a sanguine view of rising price pressures, the statement did reveal a growing concern for inflation with 10 references to ‘inflation’ in the statement. The bank explained that higher energy and commodity price could see a sizeable increase to inflation forecasts in the May report. In their Financial Stability report the bank urged borrowers to prepare for an increase in rates, which was a further signal from the bank. Even though the meeting showed a bank that is turning the page, the statement also revealed very similar conditionality such as incoming wage and inflation data. Following the meeting, markets have a bit of an overreaction by pricing in a >80% chance of a rate hike at the May meeting but was later pushed back to <30%. Given the importance of wage data, and since that is only release on the 18th of May, the most likely meeting for a first hike is the June meeting. Westpac investment bank agrees with our take with the bank expecting a 15bsp lift off in June, followed by 25bsp hikes in July, August, Oct and Nov. Even though this confirms our fundamental bullish bias, the >14 hikes priced by end 2023 means risks of lower repricing is building. 2. Idiosyncratic Drivers & Intermarket Analysis Apart from the RBA, there are 3 drivers we’re watching for the med-term outlook: Recovery – unlike other nations where growth & inflation is expected to slow, Australia is expected to see recovery, mostly thanks to stimulus in China China – With the PBoC & CCP stepping up monetary and fiscal stimulus, any recovery in China bodes well for Australia (China accounts for 40% of Australian exports). It also means the current virus situation in China posesshort-term downside risks for AUD. The AUKUS defence pact could see retaliation against Aussie goods and is worth keeping on the radar as well Commodities – Iron Ore (31%), Coal (14%) and LNG (10%) is more than 50% of Aussie exports, with rising prices giving the AUD huge support from terms of trade. If commodities remain supported it remains a support for AUD, but of course also means any sizeable corrections would weigh on the AUD, which means geopolitical and China demand developments remain focus points. 3. Global Risk Outlook As a high-beta currency, the AUD usually benefits from overall positive risk sentiment as well as environments that benefit pro-cyclical assets. Thus, both short-term (immediate) and med-term (underlying) risk sentiment will always be a key consideration for the AUD. 4. CFTC Analysis Quite strange positioning change for the AUD with Leverage Funds trimming net-shorts by a chunky amount but Asset Managers showing a whopping build up in net-short contracts. The shift in Asset Manager positioning could explain the reluctance of the AUD to make any real progress despite very positive China developments. CAD FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy The BoC delivered on expectations with a 50bsp hike as well as announcing a start to passive QT from the end of April by ending its reinvestment of maturing bonds. The bank upgraded both inflation and growth estimates as markets were expecting but did play a hawkish card by also increasing their neutral rate estimate to 2.5% from 2.25%. They acknowledged the growing risks from the current geopolitical situation but made it very clear that they are concerned about inflation and their hike of 50bsp showed that they think that policy needs to be normalized quickly (which some took as a hint that another 50bsp is on the way). The bank didn’t offer any additional clarity on QT but did note that they are not considering active QT of selling bonds just yet. Some conditionality also surfaced, where they explained that any sudden negative shocks to growth or inflation could see them pause hikes once they get closer towards neutral ( Gov Macklem also added that they might need to get rates slightly above neutral in the current cycle). Overall, it was a more hawkish than expected BoC decision, but interesting to note that STIR markets did not price in another 50bsp following the meeting (only a 25bsp) hike. We remain of the opinion that we are close to peak hawkishness for the BoC and are looking for the last push higher in the CAD for opportunities to sell. 2. Intermarket Analysis Considerations Oil’s impressive post-covid recovery has been driven by many factors such as supply & demand , global demand recovery, and more recently geopolitical concerns. At current prices the risk to demand destruction and stagflation is high, which means we remain cautious of oil in the med-term . Reason for caution: Synchronised policy tightening targeting demand, slowing growth, consensus longs, steep backwardation curve, heightened implied volatility . We remain cautious oil , but geopolitics are a key driver and focus for Petro-currencies like the CAD (even though the CAD-Oil correlation has been hit and miss). The upcoming week has a new round of OPEC meetings where the cartel is once again expected to stick to their plans to up output by 430K BPD per month. It will be interesting though to see whether recent lockdowns in China, and possible oil embargo news from the EU impacts the OPEC discussions, if at all. 3. Global Risk Outlook As a high-beta currency, the CAD usually benefits from overall positive risk sentiment as well as environments that benefit pro-cyclical assets. Thus, both short-term (immediate) and med-term (underlying) risk sentiment will always be a key consideration for the CAD. 4. CFTC Analysis Very little change in CFTC data for the CAD. We think markets are setting up a similar path compared to April 2021, Oct 2021 and Jan 2022 where markets were too aggressive to price in CAD upside only to see majority of it unwind later. As always though, timing those shorts will be very important. 5. The Week Ahead The highlight for the week ahead will be the jobs data scheduled for Friday, as well as oil market developments and risk sentiment. On the jobs data, this will be an interesting test for the Canadian labour market which have held up really well after bouncing back from the Omicron hick up. Even though we think the growth outlook for Canada is too optimistic, it might be too early to start seeing those growth concerns trickle into the jobs market as it is usually a late cycle indicator. However, in the event of a miss or a beat it might not change much in terms for the BoC just yet but given the frothy CAD price action a surprise miss could kickstart some overdue downside. Even though the correlation to oil has been rather hit and miss over the past few weeks, it’s always important to keep oil developments in mind, which means next week’s OPEC+ meetings could be an important event for Petro-currencies, especially with the possibility of oil embargo news from the EU as well. Then we also have risk sentiment to watch as the classic risk sensitivity that one would usually expect from high beta currencies like the AUD, CAD and NZD have seemingly returned with a vengeance in the past two trading weeks. That means overall risk sentiment will be an important driver to keep in mind for the CAD as well.
by thunderpips
GBP AUD - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy In March the BoE hiked rates by 25bsp as expected but delivered a bearish hike with BoE’s Cunliffe dissenting by voting to leave rates unchanged. This was a stark change from February where 4 members voted for a 50bsp hike. Cunliffe noted the negative impacts of higher commodity prices on real household incomes and economic activity as the main reason for his dissention, while remaining members thought a 25bsp hike was appropriate given the tight labour market and risks of second round effects. Even though inflation forecasts were upgraded to 8% in Q2 (previous 7.25%), the negative view that GDP was expected to slow to subdued rates showed growing concern of stagflation. The most bearish element of the statement was a change in language regarding incoming rates where the bank said they judge that some further modest tightening MIGHT be appropriate where previous guidance said more tightening was ‘LIKELY TO BE’ appropriate (a clear push against overly aggressive rate expectations). They further pushed back by noting the current implied rate path would see inflation would be below target in 3 years’ time, in other words saying they won’t hike as much, and confirms our estimates that policy reached peak hawkishness in February. The 100% odds of a 25bsp in May drifted to just above 80% on Friday, and markets will pay close attention to incoming BoE speak, where further push back against rates could be enough to see markets pricing out some of the >5 hikes still priced for 2022. As a result of the clear dovish tilt, we have adjusted our assessment of the bank’s policy stance to NEUTRAL. 2. Economic & Health Developments With inflation the main reason for the BoE’s recent rate hikes, there is a concern that the UK economy faces stagflation risk, as price pressures stay sticky while growth decelerates. That also means that current market expectations for rates continues to look too aggressive even after the BoE’s recent push back. This means downside risks for GBP if growth data push lower and/or the BoE continue to push their recent dovish tone. 3. Political Developments Political uncertainty is usually GBP negative, so the PM’s future remains a risk. If distrust grows question remains on whether a no-confidence vote can happen (if so, short-term downside is likely), and whether he can survive the vote (a win should be GBP positive and a loss GBP negative). The Northern Ireland protocol remains a focus, with previous UK threats to trigger Article 16 and EU threats to terminate the Brexit deal if they do. Markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside. 4. CFTC Analysis Very bearish signal from all three participant categories with the aggregate positioning (non-commercials, leveraged funds and asset managers) pushing below 1 standard dev from the 15-year mean. It’s important to note that this sentiment was clearly reflected given the big drop in Sterling this week. 5. The Week Ahead For Sterling in the week ahead it’ll be all eyes on the upcoming Bank of England meeting. Recall at the last meeting that we saw quite a dramatic change in sentiment among the MPC with only 8 voting for a hike and 1 dissenter voting to leave rates unchanged. This was a big change from the meeting before that where all 9 voted for a hike and 4 voted for a 50bsp hike. A 25bsp hike is fully priced in for the May meeting (as well as an additional 5 by year end after that), so markets will be keenly watching the vote split to get a clue whether the overall sentiment for hikes among MPC members are changing (will anyone join Cunliffe to dissent this time). There are reasons to believe that more MPC members could be leaning to the dovish side as recent growth data has deteriorated much more and faster than expected. Especially with recent commentary from Gov Bailey cautioning that they are walking on a tightrope between trying to fight high inflation whilst trying to avoid a recession. That means with a 25bsp hike 100% priced, the focus will be on any signals the bank provides with regard to the rate path going forward (whether they push back against the overly aggressive hike expectations or not). The balance sheet will also be in focus as the bank’s has previously suggested that they will look to actively start selling Gilts once the cash rate reaches 1.0%. By following through with a 25bsp hike next week will put them at 1.0% so any announcement of sales or of a path forward will be important. AUD FUNDAMENTAL BIAS: BULLISH 1. Monetary Policy At their April meeting, the RBA took a slightly more hawkish stance by removing their reference to ‘patience’ in terms of policy tightening. With the bank taking a sanguine view of rising price pressures, the statement did reveal a growing concern for inflation with 10 references to ‘inflation’ in the statement. The bank explained that higher energy and commodity price could see a sizeable increase to inflation forecasts in the May report. In their Financial Stability report the bank urged borrowers to prepare for an increase in rates, which was a further signal from the bank. Even though the meeting showed a bank that is turning the page, the statement also revealed very similar conditionality such as incoming wage and inflation data. Following the meeting, markets have a bit of an overreaction by pricing in a >80% chance of a rate hike at the May meeting but was later pushed back to <30%. Given the importance of wage data, and since that is only release on the 18th of May, the most likely meeting for a first hike is the June meeting. Westpac investment bank agrees with our take with the bank expecting a 15bsp lift off in June, followed by 25bsp hikes in July, August, Oct and Nov. Even though this confirms our fundamental bullish bias, the >14 hikes priced by end 2023 means risks of lower repricing is building. 2. Idiosyncratic Drivers & Intermarket Analysis Apart from the RBA, there are 3 drivers we’re watching for the med-term outlook: Recovery – unlike other nations where growth & inflation is expected to slow, Australia is expected to see recovery, mostly thanks to stimulus in China China – With the PBoC & CCP stepping up monetary and fiscal stimulus, any recovery in China bodes well for Australia (China accounts for 40% of Australian exports). It also means the current virus situation in China posesshort-term downside risks for AUD. The AUKUS defence pact could see retaliation against Aussie goods and is worth keeping on the radar as well Commodities – Iron Ore (31%), Coal (14%) and LNG (10%) is more than 50% of Aussie exports, with rising prices giving the AUD huge support from terms of trade. If commodities remain supported it remains a support for AUD, but of course also means any sizeable corrections would weigh on the AUD, which means geopolitical and China demand developments remain focus points. 3. Global Risk Outlook As a high-beta currency, the AUD usually benefits from overall positive risk sentiment as well as environments that benefit pro-cyclical assets. Thus, both short-term (immediate) and med-term (underlying) risk sentiment will always be a key consideration for the AUD. 4. CFTC Analysis Quite strange positioning change for the AUD with Leverage Funds trimming net-shorts by a chunky amount but Asset Managers showing a whopping build up in net-short contracts. The shift in Asset Manager positioning could explain the reluctance of the AUD to make any real progress despite very positive China developments. 5. The Week Ahead The focus in the week ahead will turn to the upcoming RBA policy decision, as well as China developments and commodities . For the RBA, markets are pricing in an 85% chance of a 25bsp hike at next week’s meeting after the Q1 CPI saw all three inflation measures push above the bank’s target range between 2%-3%. With CPI reaching its highest levels in two decades one can understand the reaction in STIR markets, with some participants calling for the possibility of a 15bsp, 25bsp and some even look for a 40bsp hike next week. We think there is a higher probability that the bank chooses to wait until they receive the next quarterly wage price index on the 18th of May. There is also political optics which might see them stay patient as the Federal Election takes place on the 21st of May (and no politician would want to have rates hiked for the first time in quite a while three weeks before people head to the polls). Thus, with all of that in mind we think the bank will want to stay patient, which could open up some downside risk for the AUD in the short-term. However, if they decide to come out guns blazing with a 40bsp hike that could provide a catalyst to get back into AUDCAD longs. On the China side, all eyes will be on further stimulus promises and efforts from the CCP or PBoC (which should be supportive for the AUD, even though this past week it hasn’t been enough to support the Antipode). Furthermore, the classic risk sentiment correlation has come back with a vengeance these past two weeks, which means overall risk sentiment and equity price action might be taking back the limelight from commodities .
by thunderpips
2
AUD CAD - FUNDAMENTAL DRIVERSAUD FUNDAMENTAL BIAS: BULLISH 1. Monetary Policy At their April meeting, the RBA took a slightly more hawkish stance by removing their reference to ‘patience’ in terms of policy tightening. With the bank taking a sanguine view of rising price pressures, the statement did reveal a growing concern for inflation with 10 references to ‘inflation’ in the statement. The bank explained that higher energy and commodity price could see a sizeable increase to inflation forecasts in the May report. In their Financial Stability report the bank urged borrowers to prepare for an increase in rates, which was a further signal from the bank. Even though the meeting showed a bank that is turning the page, the statement also revealed very similar conditionality such as incoming wage and inflation data. Following the meeting, markets have a bit of an overreaction by pricing in a >80% chance of a rate hike at the May meeting but was later pushed back to <30%. Given the importance of wage data, and since that is only release on the 18th of May, the most likely meeting for a first hike is the June meeting. Westpac investment bank agrees with our take with the bank expecting a 15bsp lift off in June, followed by 25bsp hikes in July, August, Oct and Nov. Even though this confirms our fundamental bullish bias, the >14 hikes priced by end 2023 means risks of lower repricing is building. 2. Idiosyncratic Drivers & Intermarket Analysis Apart from the RBA, there are 3 drivers we’re watching for the med-term outlook: Recovery – unlike other nations where growth & inflation is expected to slow, Australia is expected to see recovery, mostly thanks to stimulus in China China – With the PBoC & CCP stepping up monetary and fiscal stimulus, any recovery in China bodes well for Australia (China accounts for 40% of Australian exports). It also means the current virus situation in China posesshort-term downside risks for AUD. The AUKUS defence pact could see retaliation against Aussie goods and is worth keeping on the radar as well Commodities – Iron Ore (31%), Coal (14%) and LNG (10%) is more than 50% of Aussie exports, with rising prices giving the AUD huge support from terms of trade. If commodities remain supported it remains a support for AUD, but of course also means any sizeable corrections would weigh on the AUD, which means geopolitical and China demand developments remain focus points. 3. Global Risk Outlook As a high-beta currency, the AUD usually benefits from overall positive risk sentiment as well as environments that benefit pro-cyclical assets. Thus, both short-term (immediate) and med-term (underlying) risk sentiment will always be a key consideration for the AUD. 4. CFTC Analysis Quite strange positioning change for the AUD with Leverage Funds trimming net-shorts by a chunky amount but Asset Managers showing a whopping build up in net-short contracts. The shift in Asset Manager positioning could explain the reluctance of the AUD to make any real progress despite very positive China developments. 5. The Week Ahead The focus in the week ahead will turn to the upcoming RBA policy decision, as well as China developments and commodities . For the RBA, markets are pricing in an 85% chance of a 25bsp hike at next week’s meeting after the Q1 CPI saw all three inflation measures push above the bank’s target range between 2%-3%. With CPI reaching its highest levels in two decades one can understand the reaction in STIR markets, with some participants calling for the possibility of a 15bsp, 25bsp and some even look for a 40bsp hike next week. We think there is a higher probability that the bank chooses to wait until they receive the next quarterly wage price index on the 18th of May. There is also political optics which might see them stay patient as the Federal Election takes place on the 21st of May (and no politician would want to have rates hiked for the first time in quite a while three weeks before people head to the polls). Thus, with all of that in mind we think the bank will want to stay patient, which could open up some downside risk for the AUD in the short-term. However, if they decide to come out guns blazing with a 40bsp hike that could provide a catalyst to get back into AUDCAD longs. On the China side, all eyes will be on further stimulus promises and efforts from the CCP or PBoC (which should be supportive for the AUD, even though this past week it hasn’t been enough to support the Antipode). Furthermore, the classic risk sentiment correlation has come back with a vengeance these past two weeks, which means overall risk sentiment and equity price action might be taking back the limelight from commodities . CAD FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy The BoC delivered on expectations with a 50bsp hike as well as announcing a start to passive QT from the end of April by ending its reinvestment of maturing bonds. The bank upgraded both inflation and growth estimates as markets were expecting but did play a hawkish card by also increasing their neutral rate estimate to 2.5% from 2.25%. They acknowledged the growing risks from the current geopolitical situation but made it very clear that they are concerned about inflation and their hike of 50bsp showed that they think that policy needs to be normalized quickly (which some took as a hint that another 50bsp is on the way). The bank didn’t offer any additional clarity on QT but did note that they are not considering active QT of selling bonds just yet. Some conditionality also surfaced, where they explained that any sudden negative shocks to growth or inflation could see them pause hikes once they get closer towards neutral ( Gov Macklem also added that they might need to get rates slightly above neutral in the current cycle). Overall, it was a more hawkish than expected BoC decision, but interesting to note that STIR markets did not price in another 50bsp following the meeting (only a 25bsp) hike. We remain of the opinion that we are close to peak hawkishness for the BoC and are looking for the last push higher in the CAD for opportunities to sell. 2. Intermarket Analysis Considerations Oil’s impressive post-covid recovery has been driven by many factors such as supply & demand , global demand recovery, and more recently geopolitical concerns. At current prices the risk to demand destruction and stagflation is high, which means we remain cautious of oil in the med-term . Reason for caution: Synchronised policy tightening targeting demand, slowing growth, consensus longs, steep backwardation curve, heightened implied volatility . We remain cautious oil , but geopolitics are a key driver and focus for Petro-currencies like the CAD (even though the CAD-Oil correlation has been hit and miss). The upcoming week has a new round of OPEC meetings where the cartel is once again expected to stick to their plans to up output by 430K BPD per month. It will be interesting though to see whether recent lockdowns in China, and possible oil embargo news from the EU impacts the OPEC discussions, if at all. 3. Global Risk Outlook As a high-beta currency, the CAD usually benefits from overall positive risk sentiment as well as environments that benefit pro-cyclical assets. Thus, both short-term (immediate) and med-term (underlying) risk sentiment will always be a key consideration for the CAD. 4. CFTC Analysis Very little change in CFTC data for the CAD. We think markets are setting up a similar path compared to April 2021, Oct 2021 and Jan 2022 where markets were too aggressive to price in CAD upside only to see majority of it unwind later. As always though, timing those shorts will be very important. 5. The Week Ahead The highlight for the week ahead will be the jobs data scheduled for Friday, as well as oil market developments and risk sentiment. On the jobs data, this will be an interesting test for the Canadian labour market which have held up really well after bouncing back from the Omicron hick up. Even though we think the growth outlook for Canada is too optimistic, it might be too early to start seeing those growth concerns trickle into the jobs market as it is usually a late cycle indicator. However, in the event of a miss or a beat it might not change much in terms for the BoC just yet but given the frothy CAD price action a surprise miss could kickstart some overdue downside. Even though the correlation to oil has been rather hit and miss over the past few weeks, it’s always important to keep oil developments in mind, which means next week’s OPEC+ meetings could be an important event for Petro-currencies, especially with the possibility of oil embargo news from the EU as well. Then we also have risk sentiment to watch as the classic risk sensitivity that one would usually expect from high beta currencies like the AUD, CAD and NZD have seemingly returned with a vengeance in the past two trading weeks. That means overall risk sentiment will be an important driver to keep in mind for the CAD as well.
by thunderpips
AUD USD - FUNDAMENTAL DRIVERSAUD FUNDAMENTAL BIAS: BULLISH 1. Monetary Policy At their April meeting, the RBA took a slightly more hawkish stance by removing their reference to ‘patience’ in terms of policy tightening. With the bank taking a sanguine view of rising price pressures, the statement did reveal a growing concern for inflation with 10 references to ‘inflation’ in the statement. The bank explained that higher energy and commodity price could see a sizeable increase to inflation forecasts in the May report. In their Financial Stability report the bank urged borrowers to prepare for an increase in rates, which was a further signal from the bank. Even though the meeting showed a bank that is turning the page, the statement also revealed very similar conditionality such as incoming wage and inflation data. Following the meeting, markets have a bit of an overreaction by pricing in a >80% chance of a rate hike at the May meeting but was later pushed back to <30%. Given the importance of wage data, and since that is only release on the 18th of May, the most likely meeting for a first hike is the June meeting. Westpac investment bank agrees with our take with the bank expecting a 15bsp lift off in June, followed by 25bsp hikes in July, August, Oct and Nov. Even though this confirms our fundamental bullish bias, the >14 hikes priced by end 2023 means risks of lower repricing is building. 2. Idiosyncratic Drivers & Intermarket Analysis Apart from the RBA, there are 3 drivers we’re watching for the med-term outlook: Recovery – unlike other nations where growth & inflation is expected to slow, Australia is expected to see recovery, mostly thanks to stimulus in China China – With the PBoC & CCP stepping up monetary and fiscal stimulus, any recovery in China bodes well for Australia (China accounts for 40% of Australian exports). It also means the current virus situation in China posesshort-term downside risks for AUD. The AUKUS defence pact could see retaliation against Aussie goods and is worth keeping on the radar as well Commodities – Iron Ore (31%), Coal (14%) and LNG (10%) is more than 50% of Aussie exports, with rising prices giving the AUD huge support from terms of trade. If commodities remain supported it remains a support for AUD, but of course also means any sizeable corrections would weigh on the AUD, which means geopolitical and China demand developments remain focus points. 3. Global Risk Outlook As a high-beta currency, the AUD usually benefits from overall positive risk sentiment as well as environments that benefit pro-cyclical assets. Thus, both short-term (immediate) and med-term (underlying) risk sentiment will always be a key consideration for the AUD. 4. CFTC Analysis Quite strange positioning change for the AUD with Leverage Funds trimming net-shorts by a chunky amount but Asset Managers showing a whopping build up in net-short contracts. The shift in Asset Manager positioning could explain the reluctance of the AUD to make any real progress despite very positive China developments. 5. The Week Ahead The focus in the week ahead will turn to the upcoming RBA policy decision, as well as China developments and commodities. For the RBA, markets are pricing in an 85% chance of a 25bsp hike at next week’s meeting after the Q1 CPI saw all three inflation measures push above the bank’s target range between 2%-3%. With CPI reaching its highest levels in two decades one can understand the reaction in STIR markets, with some participants calling for the possibility of a 15bsp, 25bsp and some even look for a 40bsp hike next week. We think there is a higher probability that the bank chooses to wait until they receive the next quarterly wage price index on the 18th of May. There is also political optics which might see them stay patient as the Federal Election takes place on the 21st of May (and no politician would want to have rates hiked for the first time in quite a while three weeks before people head to the polls). Thus, with all of that in mind we think the bank will want to stay patient, which could open up some downside risk for the AUD in the short-term. However, if they decide to come out guns blazing with a 40bsp hike that could provide a catalyst to get back into AUDCAD longs. On the China side, all eyes will be on further stimulus promises and efforts from the CCP or PBoC (which should be supportive for the AUD, even though this past week it hasn’t been enough to support the Antipode). Furthermore, the classic risk sentiment correlation has come back with a vengeance these past two weeks, which means overall risk sentiment and equity price action might be taking back the limelight from commodities. USD FUNDAMENTAL BIAS: BULLISH 1. Monetary Policy In March the Fed delivered on a 25bsp hike as expected with Fed’s Bullard the only dissenter voting for a 50bsp hike. The Dot Plot saw a big upgrade from 3 hikes (Dec) to 7 hikes for 2022, with the FFR seen reaching 2.75%- 3.0% in 2023 before falling in 2024. They did however lower their neutral rate from 2.5% to 2.4% which were a negative. Inflation forecasts for 2022 were raised to 4.1% (previous 2.7%) but med-term inflation saw less aggressive upgrades. Even though the overall message and projections were hawkish, the fact that GDP estimates were lowered to 2.8% from 4.0% shows the Fed expects their actions to impact demand and also reflect some of the recent geopolitical uncertainties. The Fed didn’t share new details on QT but noted that the decision to start selling assets will be made at a coming meeting (markets consensus sees a July start as likely) and added that good progress in QT discussions means a May announcement is likely. During the presser the Chair expressed his view that the economy is doing really well and, should be more than able to withstand the incoming rate hikes (a very similar situation like we had in 4Q18). When asked whether 50bsp hikes could be on the table, the chair explained that the FOMC has not made decision to front-load hikes and will keep an eye on incoming inflation data to determine their policy actions going forward, but of course added that every incoming meeting was live. Overall, the Fed was hawkish, but due to very strong pre-positioning and close to peak hawkishness priced for STIR markets the meeting saw a ‘sell-the-fact’ reaction across major asset classes. 2. Global & Domestic Economy As the reserve currency, the USD’s global usage means it’s usually inversely correlated to the global economy and global trade. The USD usually appreciates when growth & inflation slows (disinflation) and depreciates when growth & inflation accelerates (reflation). Thus, current expectations of a cyclical slowdown are a positive driver for the Dollar. Incoming data will be watched in relation to the ‘Fed Put’ as there are many similarities between now and 4Q18, where the Fed were also tightened into a slowdown. If growth data slows and the Fed stays hawkish it’s a positive for the USD, however if the Fed pivots dovish that’ll be a negative driver for the USD. 3. CFTC Analysis Aggregate USD positioning remains close to 1 standard deviation above the mean, and close to prior tops where the USD topped out in previous cycles. That does not change the bullish outlook for the USD in the med-term but means that we would wait for pullbacks before initiating new longs with price at new cycle highs. 4. The Week Ahead The main event for the week ahead will no doubt be the FOMC meeting, but we’ll also get ISM PMIs as well as the April jobs print coming our way. For the FOMC, we think the Fed has set themselves a very high hawkish bar going into the meeting. STIR markets are pricing in 3 back-to-back 50bsp hikes, as well as an earlier start to QT ($95bn p/m). On the language side, recent Fed speak has seen even the doves find their inner hawks by talking up very aggressive policy tightening. So, with all of that as the baseline going into the meeting, it means the Fed would need to hike 75bsp and up the expected QT pace to really surprise markets. With the USD and Yields at cycle highs and equities at cycle lows, that increases the chances of some sell-the-fact reactions. This would be our preferred strategy for the USD going into the week. Then we also have the data where the ISM PMI data will be closely watched for further clues of whether growth is slowing faster than expected. On the jobs side, the impact of the NFP will most likely be dictated by the outcome of the FOMC decision. If the Fed manages to surprise on the hawkish side (seems unlikely) a beat in jobs won’t do much to change that, but a miss can certainly do a lot to stir the pot (even more so if the Fed decision is interpreted as ‘less hawkish’.
by thunderpips
3
GBP/AUD Downtrend May Resume on Wedge BreakoutThe Australian Dollar may resume gains against the British Pound following weakness since early April. GBP/AUD's bounce has been slowing, and now a breakout under a bearish Rising Wedge is in focus. Further downside confirmation could hint at downtrend resumption, placing the focus on the early-April low at 1.7175. Beyond that sits the 2018 and October 2017 low. This is as the 50-day Simple Moving Average could continue maintaining a broader downside bias, holding as resistance in the event of a turn higher. Otherwise, confirming a breakout above 1.7887 could precede further upside progress towards the March high. FX_IDC:GBPAUD
Short
by QM_Dubrovsky
1
AUDCHF: Your Trading Plan For Today 🇦🇺🇨🇭 Hey traders, AUDCHF formed a huge head and shoulders pattern on a daily. This week its horizontal neckline was broken, now we see its retest. To short with a confirmation, I am currently monitoring a triple top pattern on 1H. We need an hourly candle close below its neckline to confirm a bearish continuation. Only then I will short on a retest. Initial target will be 0.683 If the price sets a new higher high on 1H, the setup will be invalid. ❤️If you have any questions, please, ask me in the comment section. Please, support my work with like, thank you!❤️
Short
by VasilyTrader
5