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AUD CAD - FUNDAMENTAL DRIVERSAUD FUNDAMENTAL BIAS: WEAK 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 a solid recovery, also thanks to expected recovery in China China – With the PBoC stepping up stimulus & expectations of further fiscal support in 1H22, the projected recovery in China bodes well for Australia as China makes up close to 40% of Australian exports. It also means the growing virus cases and lockdowns and subsequent miss in recent Chinese PMI data does pose short-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, and rising prices has seen huge support for AUD on the terms of trade boost. 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 are important. 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 It’s taken many weeks of stretched positioning, but AUD net-shorts have continued to unwind and have moved out of stretched territory with the recent CFTC data update. After a decent run higher, price action has been looking stretched, which means we’ll prefer deeper pullbacks before initiating new med-term AUD longs. 5. The Week Ahead The jobs report will be the highlight for Aussie data this week. Markets are not expecting a monster print but forecasting enough employment gains to push the Unemployment Rate below 3.9% (close to record lows of 3.8%). At this stage in the game, it’s unlikely that either a miss or a beat would change anything for the rate outlook as markets already pushed back unrealistic rate expectations for a May hike to June. Given stretched pricing for the AUDCAD, a miss would suite our bias well if it can be accompanied by a hawkish BoC as that could provide us with a decent pullback to buy back at more attractive levels. Apart from the RBA focus will also be on China and commodities. Any further stimulus promises or measures from China will be important. For commodities, the geopolitical tensions have seen commodity prices surge and have given Australia’s terms of trade a solid boost. As commodities have been supported by geopolitical stress and stimulus hopes from China, anything that dents that optimism and sees mean reversion in commodities will be important to watch for the AUD. This also means that the AUD might counterintuitively trade mixed on geopolitical de-escalations depending on how commodities react. CAD FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy The BoC did not surprise at their March meeting by hiking rates to 0.50% from 0.25% and continuing the reinvestment phase regarding asset purchases. The bank noted that the Russia/Ukraine war was a new major uncertainty for the economy and that as a result inflation is now expected to be higher in the near-term. They were optimistic about the growth outlook though and reiterated that it expects further interest rate rises will be needed. On the QT side, Gov Macklem noted that around 40% of the bank's bond holdings were due to mature within two years, and suggested that balance sheet could shrink quickly, and also added that they will discuss ending the reinvestment phase and starting QT at the April meeting. The Governor also said he didn’t rule out the potential for 50bsp rate rises as oil is putting upside pressure on CPI , noting that oil prices around $110 per barrel could add another percentage point to inflation . With markets implying close to another 8 hikes this year, we remain cautious on the currency as a slowing US and Canadian economy means the bank could struggle to maintain its current hawkish path in the weeks and months ahead. 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 remain a key driver and focus for Petro-currencies like the CAD (even though the CAD-Oil correlation has been hit and miss). 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 Another very bullish positioning signal with Large Specs and Asset Managers increasing longs and Leverage Funds decreasing shorts. With Asset Manager net-longs reaching top 80 percentile levels (2007 base year) 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. For now, timing is very important, and we’ll wait for a potential hawkish BoC to use outsized strength for AUDCAD & USDCAD long opportunities. 5. The Week Ahead Hoping for a hawkish BoC and a 50bsp but not for buying opportunities in the CAD. Following decent economic data as well as comments from BoC’s Kozicki (who said the bank will be 'forceful' to fight ‘hot’ inflation ) markets are pricing in close to a 90% chance of a 50bsp hike for this week’s meeting. At their previous meeting, Governor Macklem explained that starting QT would be the logical next step for policy, which means a QT announcement is also on the card and in line with consensus expectations. Given our med-term neutral outlook for the CAD, we are hoping for a hawkish BoC that not only delivers on a 50bsp hike as well as a QT start, but also providing signals of another 50bsp in June. The faster the market moves to price in another 50bsp hike as well as QT, the faster we’ll get to a peak hawkishness scenario. With >9 hikes expected by the end of 2022, a market that fully prices in another 50bsp hike after a hawkish BoC will such a lot of buyers in at the highs and when markets start repricing the curve lower that will set up good shorting opportunities against the CAD.
by thunderpips
EURAUD: Trend-Following Trading Setup 🇪🇺🇦🇺 Hey traders, EURAUD is trading in a long-term bearish trend. After setting a new low this month, the pair retraced to a strong confluence zone: the underlined yellow area is based on a daily structure resistance and 382 retracement of the last bearish impulse. Within that zone, the market formed a double top formation. To short the market with a confirmation you need an hourly candle close below the neckline of the pattern. Then you can short on a retest Targets will be 1.442 / 1.436 If the price sets a new higher high on hourly the setup will be invalid. ❤️Please, support this idea with like and comment!❤️
Short
by VasilyTrader
5
Australian bond yields rise after RBA leaves key rate unchangedThe market is currently pricing 7 rate hikes ending in the Q2-Q4 2023 range. To quote Statement by Philip Lowe, Governor of the RBA: "Inflation has increased in Australia, but it remains lower than in many other countries; in underlying terms, inflation is 2.6 per cent and in headline terms it is 3.5 per cent. Higher prices for petrol and other commodities will result in a further lift in inflation over coming quarters, with an updated set of forecasts to be published in May. The main sources of uncertainty relate to the speed of resolution of the various supply-side issues, developments in global energy markets and the evolution of overall labour costs. Financial conditions in Australia continue to be highly accommodative. Interest rates remain at a very low level, although fixed mortgage rates for new loans have risen recently. The Australian dollar exchange rate has appreciated due to the higher commodity prices and, in TWI terms, is around the level of a year ago. Housing prices have risen strongly over the past year, although some housing markets have eased recently. With interest rates at historically low levels, it is important that lending standards are maintained and that borrowers have adequate buffers. The Board's policies during the pandemic have supported progress towards the objectives of full employment and inflation consistent with the target. The Board has wanted to see actual evidence that inflation is sustainably within the 2 to 3 per cent target range before it increases interest rates. Inflation has picked up and a further increase is expected, but growth in labour costs has been below rates that are likely to be consistent with inflation being sustainably at target. Over coming months, important additional evidence will be available to the Board on both inflation and the evolution of labor costs. The Board will assess this and other incoming information as its sets policy to support full employment in Australia and inflation outcomes consistent with the target." It is important to note the change in rhetoric with the governor mentioning that inflation could head higher with no mention of when the RBA expects to hike rates. For the full statement, visit the official RBA website: www.rba.gov.au The CAPITALCOM:AUDUSD broke out of key resistance with the price increasing likely to roll over back to pre release price.
TVC:AU10YLong
by GrizzlyBearBee
AUD CAD - FUNDAMENTAL DRIVERSAUD FUNDAMENTAL BIAS: WEAK BULLISH 1. Monetary Policy At their March meeting, the bank didn’t do much to surprise markets and stuck to a similar script compared to the previous meeting, with the exception of adding the Russia/Ukraine war as a major new source of uncertainty. While Unemployment is at 4.2% and expected to be below 4% throughout 2023, and with Inflation above the middle of the target range and expected to rise to 3.25 this year and stay at 2.75% throughout 2023, the continues dovish façade is getting a little embarrassing for the bank. Even though wage growth failed to surprise higher, consensus still expects it to reach 3% in Q2 and well above 3% in Q3, and once the 3% level is reached the RBA would have complete ran out of reasons to stay dovish. It’s clear that markets are looking straight through this though as STIR markets, bond yields and the AUD failed to see any real downside after the meeting and continued higher after a very brief and small dip lower. For now, the bank stays dovish, but the longer they stay in denial the longer the chances of a more aggressive hawkish pivot later. 2. Idiosyncratic Drivers & Intermarket Analysis Apart from the RBA, there are 4 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 a solid recovery, also thanks to expected recovery in China China – With the PBoC stepping up stimulus & expectations of further fiscal support in 1H22, the projected recovery in China bodes well for Australia as China makes up close to 40% of Australian exports. However, the AUKUS defence pact could see retaliation against Aussie goods and is worth keeping on the radar Commodities – Australia’s biggest commodities Iron Ore (31%), Coal (14%) and LNG (10%) keep grinding higher for various reasons, one being China’s expected recovery and the other the energy and inflation concerns. As long as these commodities are supported, they should continue to support the AUD. 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 Even though bearish AUD positioning saw big unwinds three weeks ago, large specs and leveraged funds still hold stretched shorts (within bottom 20% of net-shorts going back to 2007). This still points to the possibility of short squeezes for the AUD if we see positive sentiment shifts so worth keeping in mind going into the RBA. However, price action has been very one-sided in recent weeks so we are treading carefully with new longs. 5. The Week Ahead In the week ahead the biggest focus for the AUD will be the RBA policy decision. Markets are expecting the bank to offer no real surprises and use the meeting as a placeholder until we get the election out of the way and until the bank has seen more inflation and wage growth data for Q2. Given the very aggressive STIR market pricing for 2022 (over 200bsp of tightening already priced), as well as the solid upside we’ve seen from the terms of trade boost, there is arguably some downside risks for the AUD if the RBA sticks to their dovish script. The markets have of course ignored their dovish tones, and even though a continued dovish tone won’t change market’s expectations of hikes this year, it could push out some of the dates as >200bsp seems close to impossible right now (same can be said for most major central bank pricing right now though). Apart from the RBA focus will also be on China and commodities. For China, the Caixin Services PMI will be interesting after the big drop in Mfg last week, where a negative print could weigh on the AUD and a positive print be supportive. Any further stimulus promises or measures from the CCP or PBoC is also worth the watch. For commodities, the geopolitical tensions and support from China has seen key Australian commodity exports like Iron Ore, LNG and Coal remain well supported, which has given Australia’s terms of trade quite a boost. As commodities have been supported by geopolitical stress and stimulus hopes from China, anything that dents that optimism and sees some mean reversion in commodity moves will be important to watch for the AUD. This also means that the AUD might counterintuitively trade mixed on geopolitical de-escalations depending on how commodities react. CAD FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy The BoC did not surprise at their March meeting by hiking rates to 0.50% from 0.25% and continuing the reinvestment phase regarding asset purchases. The bank noted that the Russia/Ukraine war was a new major uncertainty for the economy and that as a result inflation is now expected to be higher in the near-term. They were optimistic about the growth outlook though and reiterated that it expects further interest rate rises will be needed. On the QT side, Gov Macklem noted that around 40% of the bank's bond holdings were due to mature within two years, and suggested that balance sheet could shrink quickly, and also added that they will discuss ending the reinvestment phase and starting QT at the April meeting. The Governor also said he didn’t rule out the potential for 50bsp rate rises as oil is putting upside pressure on CPI , noting that oil prices around $110 per barrel could add another percentage point to inflation . With markets implying close to another 8 hikes this year, we remain cautious on the currency as a slowing US and Canadian economy means the bank could struggle to maintain its current hawkish path in the weeks and months ahead. 2. Intermarket Analysis Considerations Oil’s impressive post-covid recovery has been driven by factors such as supply & demand (OPEC’s production cuts), strong global demand recovery, and of course ‘higher for longer’ inflation . The geopolitical crisis saw upside in WTI that reached levels last seen since in 2008. At these levels the risk to demand destruction and stagflation is high which means we remain cautious of oil in the med-term . Reason for that view is: Synchronised policy tightening from DM central banks targeting demand, slowing growth, consensus that is very long oil , steep backwardation curve (usually sees negative forward returns), heightened implied volatility . Even though we remain cautious on oil , the geopolitical risks remains a key focus for oil and thus for Petro-currencies like the CAD and NOK (even though the CAD-Oil correlation has been hit and miss). 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 bullish positioning signals with large specs and leveraged funds trimming shorts and asset managers adding a big 20K net-longs. It seems markets are warning to the idea of a 50bsp hike from the BoC after recent BoC comments. We continue to think recent price action is potentially setting up a similar path compared to April and Oct 2021 where markets were too aggressive and optimistic to price in upside for the CAD, only to then see majority of it unwind later. We’ll use any outsized strength for AUDCAD long opportunities. 5. The Week Ahead There are two key economic releases in focus for the CAD this week with the Business Outlook Survey coming up on Monday and the Jobs report on Friday. With recent comments from the BoC turning up the hawkish rhetoric, the data this week will be eyed to get a better sense of whether the BoC will move by 25bsp or 50bsp at their next meeting. For the Business Outlook Survey markets participants are expecting a solid price due to increased commodity prices after the war broke out. Furthermore, the markets are looking for a continuation in the job gains, even though we’ve explained before that the previous print wasn’t all that it was made out to be with net-job gains not as spectacular as some made it out to be. After Friday’s solid US NFP, and after the recent BoC comments the jobs print and the Business Outlook Survey could be enough to push STIR markets over the edge and start pricing in a 50bsp. Even though that can certainly be positive for currency, we don’t have appetite to chase the CAD higher as it’s seen a lot of one-sided upsides which does make it vulnerable to correction. Our preferred longs are AUDCAD and USDCAD but waiting for a catalyst to trade looks like the best course of action right now.
by thunderpips
2
Today’s Notable Sentiment ShiftsCAD – The Canadian dollar strengthened to its highest level in nearly five months against USD on Wednesday as oil prices rose and investors rebalanced portfolios for the end of Q1. KnightsbridgeFX succinctly noted that “We are seeing some month-end and quarter-end flows which are generally loonie-positive. Outside of that, we have seen a bit more strength in the oil markets.” Antipodeans – The Australian and New Zealand dollars paused to digest a month’s worth of hefty gains on Wednesday as markets waited to see if Russian talk of de-escalating its military operation in Ukraine actually bore fruit. Indeed, commenting on AUD’s performance, Reuters notes that “investors were content to bank the Aussie’s recent gains which have seen it reach five-month highs on the US dollar, a five-year peak on the euro and a seven-year peak on the yen.”
by thunderpips
1
AUD CAD - FUNDAMENTAL DRIVERSAUD FUNDAMENTAL BIAS: WEAK BULLISH 1. Monetary Policy At their March meeting, the bank didn’t do much to surprise markets and stuck to a similar script compared to the previous meeting, with the exception of adding the Russia/Ukraine war as a major new source of uncertainty. While Unemployment is at 4.2% and expected to be below 4% throughout 2023, and with Inflation above the middle of the target range and expected to rise to 3.25 this year and stay at 2.75% throughout 2023, the continues dovish façade is getting a little embarrassing for the bank. Even though wage growth failed to surprise higher, consensus still expects it to reach 3% in Q2 and well above 3% in Q3, and once the 3% level is reached the RBA would have complete ran out of reasons to stay dovish. It’s clear that markets are looking straight through this though as STIR markets, bond yields and the AUD failed to see any real downside after the meeting and continued higher after a very brief and small dip lower. For now, the bank stays dovish, but the longer they stay in denial the longer the chances of a more aggressive hawkish pivot later. 2. Idiosyncratic Drivers & Intermarket Analysis Apart from the RBA, there are 4 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 a solid recovery, also thanks to expected recovery in China China – With the PBoC stepping up stimulus & expectations of further fiscal support in 1H22, the projected recovery in China bodes well for Australia as China makes up close to 40% of Australian exports. However, the AUKUS defence pact could see retaliation against Aussie goods and is worth keeping on the radar Commodities – Australia’s biggest commodities Iron Ore (31%), Coal (14%) and LNG (10%) keep grinding higher for various reasons, one being China’s expected recovery and the other the energy and inflation concerns. As long as these commodities are supported, they should continue to support the AUD. 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 Even though the bag holders of massive net-short positions on the AUD finally saw some punchy unwinds last week, the most recent data updated until Tuesday showed an increase in net-shorts again for Large Specs and Leveraged Funds. For weeks now we’ve been very surprised by the reluctance of big net-short positions to unwind. Given all the recent positive developments for the AUD we would have expected a bigger unwind already. Last week’s increase in shorts still paints current positioning as a contrarian indicator for AUD upside. 5. The Week Ahead The week ahead will be extremely quiet on the data from for the AUD. Which means the overall focus will fall to China, commodities and risk sentiment. The announcements from the CCP two weeks ago saw immediate support for Chinese equities and also boosted Aussie commodity prices which in turn supported the AUD. Thus, any continued good news from China will be a key catalyst to watch for the antipodean. This is closely linked to commodities as well, where Australia’s key commodity exports Iron Ore, LNG and Coal have remained well supported, and any news or developments that keep them supported or cause them to drop will be very important for the AUD. Over the weekend we heard of additional lockdown measures in China, which will be another focus point for the AUD in the week ahead as any expectations that lockdowns will alter the expected recovery will be a negative. As always risk sentiment remains a focus for the AUD, where any major developments between Russia and Ukraine can have an impact, but commodities have been the dominant driver for the AUD in recent weeks so the sensitivity to pure risk flows has been less intense than usual. Our preferred way of expressing expected strength for the AUD is versus the CAD (check out recent trade ideas for information on why). It’s important to note that price action has been very one-side to the upside and is looking rather stretched so some short-term corrective price action should not be surprising without any key catalysts or drivers. CAD FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy The BoC did not surprise at their March meeting by hiking rates to 0.50% from 0.25% and continuing the reinvestment phase regarding asset purchases. The bank noted that the Russia/Ukraine war was a new major uncertainty for the economy and that as a result inflation is now expected to be higher in the near-term. They were optimistic about the growth outlook though and reiterated that it expects further interest rate rises will be needed. On the QT side, Gov Macklem noted that around 40% of the bank's bond holdings were due to mature within two years, and suggested that balance sheet could shrink quickly, and also added that they will discuss ending the reinvestment phase and starting QT at the April meeting. The Governor also said he didn’t rule out the potential for 50bsp rate rises as oil is putting upside pressure on oil, noting that oil prices around $110 per barrel could add another percentage point to inflation. With markets implying close to another 5 hikes this year, we remain cautious on the currency as a slowing US and Canadian economy means the bank should struggle to maintain its current hawkish path in the weeks and months ahead. 2. Intermarket Analysis Considerations Oil’s massive post-covid recovery has been impressive, driven by various factors such as supply & demand (OPEC’s production cuts), strong global demand recovery, and of course ‘higher for longer’ than expected inflation. The geopolitical crisis the world is facing right now have opened up a big push higher in WTI, trading at levels last seen since 2008. With oil prices at these levels the risk to demand destruction and stagflation is higher than ever and means we remain cautious of oil in the med-term. Reason for that view is: Synchronised policy tightening from DM central banks targeting demand, slowing growth and inflation, a consensus that is very long oil (growing calls for $100 WTI), very steep backwardation futures curve which usually sees negative forward returns, heightened implied volatility. However, recent geopolitical risks have been a key focus point for oil and means escalation and de-escalation will be important to watch. OPEC+ will also be in focus next week but the cartel is not expected to announce any changes to their output plans. 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 Large Specs (big increase in net-shorts) and Asset Managers (big increase in net-longs) are at odds with recent positioning changes. We continue to think the recent price action and positioning data has seen the CAD take a very similar path compared to April and Oct 2021 where markets were too aggressive and optimistic to price in upside for the CAD, only to then see majority of it unwind. However, oil prices, inflation and recent hawkish BoC comments remain in focus as keys intermarket drivers, albeit the oil correlation has been hit and miss. 5. The Week Ahead The data schedule is feather light for the CAD this week. We continue to remain cautious on the CAD and despite continued calls for a roaring economy we do not share the optimism. The recent jobs print, even though it was positive at face value, was not that impressive when incorporating the Omicron-related drop. Furthermore, even though inflation were higher than expected, it wasn’t the type of upside scare we’ve seen in other economies like the US, UK and EU. The CAD jolted higher on Friday with strong language from the BoC deputy governor who talked up more aggressive policy in the face of higher inflation. However, they also shared our concerns by noting that the levels of current debt levels will make aggressive hikes problematic due to current debt levels. If expectations for a slowdown in the US and Canadian economies are correct, it increases the probability that the BoC will need to turn dovish in coming months and means we doubt whether the bank will be able to get close to the >8 hikes priced in by STIR markets. Thus, we continue to look for upside in the AUDCAD on a med-term basis, but in the short-term we are cautious of some corrective price action after the one-sided upside we saw recently, so just keep that in mind.
by thunderpips
3