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CAD JPY - FUNDAMENTAL DRIVERSCAD FUNDAMENTAL BIAS: BULLISH 1. The Monetary Policy outlook for the BoC At their Oct meeting the BoC surprised to put an early end to QE purchases and updated forward guidance to suggest an earlier lift off in rates by explaining that project economic slack to be absorbed by the middle quarters of 2022. The initial reaction was bullish as one would expect but the biggest risk to further upside for the CAD from here is the fact that a lot of these positives that was confirmed by the BoC has already been reflected in both the CAD and rates markets over the past few weeks. The CAD has seen a similar run to the upside back in 1Q21 with the BoC’s hawkish tilt, and similarly to that we feel current prices for rates and the CAD already reflect a great deal of the positives. Thus, even though the med-term outlook remains tilted to the upside for the CAD, there is the risk of seeing some unwind of the recent upside and is something to be mindful of when making any med-term allocations to the upside in the CAD. 2. Commodity-linked currency with dependency on Oil exports Oil massive post-covid recovery continues on the back of three drivers: supply & demand (OPEC’s production cuts); improving global economic outlook and improving oil demand outlook, even though slightly pushed back by Delta concerns; rising inflation expectations. Even though further gains for Oil will arguably prove to be an uphill battle, the bias remains higher in the med-term as long as current supportive factors and drivers remains intact. There will of course be short-term ebbs and flows which could affect the CAD from an intermarket point of view, but as long as the med-term view for Oil remains higher it should be supportive for Petro-currencies like the CAD. OPEC seems content to stick to their plan to bring oil supply back gradually, by this past week deciding to bring the expected 400K barrels of supply online from next month. The one risk factor to watch for Oil is the pressure being placed on OPEC from the US administration to pump more oil in order to cool rising oil prices. Until now, OPEC have not been moved to cave to the US pressure, but there is the risk that Saudi Arabia buckles under the pressure and opts to push for higher production in the months ahead. Similarly, we also need to keep an eye on the US in the case they release some of their strategic reserves which should be a short-term headwind for Oil . 3. Developments surrounding the global risk outlook. As a high-beta currency, the CAD benefited from the market's improving risk outlook coming out of the pandemic as participants moved out of safe-havens. As a pro-cyclical currency, the CAD enjoyed upside alongside other cyclical assets supported by reflation and post-recession recovery best. If expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the CAD in the med-term , but recent short-term jitters are a timely reminder that risk sentiment is also a very important short-term driver. 4. CFTC Analysis Latest CFTC data showed a positioning change of +842 with a net non-commercial position of +4162. With a lot of positives in the price for the CAD and the front-end yields, it is encouraging to see that positioning isn’t stretched large specs or leveraged funds. That suggests that further upside could be possible if short-term sentiment for oil and risk assets remain favourable. However, since prices do look stretched, and since JPY positioning is very net-short, any sudden risk off bouts could see some decent mean reversion opportunities in CADJPY to the downside, especially if oil prices also come under pressure as falling oil prices will be a double positive for the JPY. JPY FUNDAMENTAL BIAS: BEARISH 1. Safe-haven status and overall risk outlook As a safe-haven currency, the market's risk outlook is the primary driver of JPY. Economic data rarely proves market moving; and although monetary policy expectations can prove highly market-moving in the short-term, safe-haven flows are typically the more dominant factor. The market's overall risk tone has improved considerably following the pandemic with good news about successful vaccinations, and ongoing monetary and fiscal policy support paved the way for markets to expect a robust global economic recovery. Of course, there remains many uncertainties and many countries are continuing to fight virus waves, but as a whole the outlook has kept on improving over the past couple of months, which would expect safe-haven demand to diminish and result in a bearish outlook for the JPY. 2. Low-yielding currency with inverse correlation to US10Y As a low yielding currency, the JPY usually shares an inverse correlation to strong moves in yield differentials, more specifically in strong moves in US10Y . However, like most correlations, the strength of the inverse correlation between the JPY and US10Y is not perfect and will ebb and flow depending on the type of market environment from a risk and cycle point of view. With bond yields looking a bit stretched at the current levels any decent mean reversion is expected to be supportive for the JPY, so it remains a key asset class to keep track. 3. CFTC Analysis Latest CFTC data showed a positioning change of -588 with a net non-commercial position of -107624. The past few weeks of price action in the JPY was mostly driven by the excessive moves we saw in yields on the US side but was also exacerbated by risk on flows and rising oil prices which is a negative driver for Japan for its terms of trade. Even though the bias for the JPY remains firmly tilted to the downside, the moves across JPY pairs is arguably still looking stretched, and with both large speculators and leveraged funds firmly in net-short territory the odds of some mean reversion has increased. We would prefer waiting for some of the froth to mean revert before looking for new JPY shorts. As always, any major risk off flows can still support the JPY, especially with quite a sizable net-short position still built up in the currency for large speculators as well as leveraged funds, but rates have been the key driver in the short-term. The recent violent repricing in bond markets saw a huge push lower in yields that has supported the JPY, if that continues and we also see some risk off tones keep the stretched positioning in mind as it could see a big unwind if conditions align correctly.
by thunderpips
1
USD CAD - FUNDAMENTAL DRIVERSUSD FUNDAMENTAL BIAS: WEAK BULLISH 1. The Monetary Policy outlook for the FED Another bank that was hawkish in deed by dovish in word in their Nov policy decision. The Fed official announced tapering as expected, with purchases said to be reduced this month at a pace of $10bln in Treasuries and $5bln in MBS per month and explained that a mid-2022 conclusion is still their base case. There were also some hawkish language changes about inflation , with the bank dropping previous comments that called inflation transitory and replacing it with ‘expected to be transitory’, basically leaving some optionality to pivot more aggressively with tapering should price pressures stay sticky for too long. However, Fed Chair Powell did a really good job to put on a familiar dovish front by explaining that they see the current price pressures as driven by supply bottlenecks and still see those pressures cooling down in in 1H22, essentially giving themselves half a year of ‘tolerating’ the current inflation overshoot. Apart from that, Chair Powell explained that they would need to see maximum employment before their conditions for a lift off in rates would be met, and also explained that its likely that full employment could be reached by mid-2022. That endorsed the idea that a 2h22 hike is possible, but the Chair refused to provide any idea of what maximum employment would look like. On the rate front, Powell also explained that they think they can be patient with rates right now as they want more time to see in what shape the economy is in after the current covid shocks have calmed and after bottlenecks have eased. Overall, a policy meeting that was hawkish in their actions but dovish in their words. 2. Real Yields With a Q4 taper start and mid-2022 taper conclusion on the card, we think further downside in real yields will be a struggle and the probability are skewed higher given the outlook for growth, inflation and policy, and higher real yields should be supportive for the USD in the med-term . 3. The global risk outlook One supporting factor for the USD from June was the onset of downside surprises in global growth. However, there has been a growing chorus of market participants looking for a possible bounce in growth data in Q4 after the covid and supply chain related slowdown in Q3. If we do indeed see a pickup in growth, while inflation is still elevated, that would mean a reflationary environment, which is usually a negative input for the Dollar, so we want to keep that in mind when assessing the incoming US economic data in the next few weeks. 4. Economic Data With the FOMC in the mix, the other economic data points largely took a back seat this past week, with even NFP not really creating a lot of meaningful or sustainable volatility . We did however see a late session sell-off in the Dollar, which was arguably more driven by technical factors as the Dollar topped out at key technical resistance and could also have been some profit taking after the recent push higher. This upcoming week’s main economic event will be Oct CPI and will be an event worth keeping on the radar after this past week’s FOMC. 5. CFTC Analysis Latest CFTC data showed a positioning change of +525 with a net non-commercial position of +34982. Positioning isn’t anywhere near stress levels for the USD, but the speed of the build-up in large specular positioning has been sizeable on a 1-year look back period. Thus, even though the med-term bias remains unchanged, it does mean the USD could be sensitive to mean reversion risks just like we saw on Friday while we are still trading close to YTD highs. CAD FUNDAMENTAL BIAS: BULLISH 1. The Monetary Policy outlook for the BoC At their Oct meeting the BoC surprised to put an early end to QE purchases and updated forward guidance to suggest an earlier lift off in rates by explaining that project economic slack to be absorbed by the middle quarters of 2022. The initial reaction was bullish as one would expect but the biggest risk to further upside for the CAD from here is the fact that a lot of these positives that was confirmed by the BoC has already been reflected in both the CAD and rates markets over the past few weeks. The CAD has seen a similar run to the upside back in 1Q21 with the BoC’s hawkish tilt, and similarly to that we feel current prices for rates and the CAD already reflect a great deal of the positives. Thus, even though the med-term outlook remains tilted to the upside for the CAD, there is the risk of seeing some unwind of the recent upside and is something to be mindful of when making any med-term allocations to the upside in the CAD. 2. Commodity-linked currency with dependency on Oil exports Oil massive post-covid recovery continues on the back of three drivers: supply & demand (OPEC’s production cuts); improving global economic outlook and improving oil demand outlook, even though slightly pushed back by Delta concerns; rising inflation expectations. Even though further gains for Oil will arguably prove to be an uphill battle, the bias remains higher in the med-term as long as current supportive factors and drivers remains intact. There will of course be short-term ebbs and flows which could affect the CAD from an intermarket point of view, but as long as the med-term view for Oil remains higher it should be supportive for Petro-currencies like the CAD. OPEC seems content to stick to their plan to bring oil supply back gradually, by this past week deciding to bring the expected 400K barrels of supply online from next month. The one risk factor to watch for Oil is the pressure being placed on OPEC from the US administration to pump more oil in order to cool rising oil prices. Until now, OPEC have not been moved to cave to the US pressure, but there is the risk that Saudi Arabia buckles under the pressure and opts to push for higher production in the months ahead. Similarly, we also need to keep an eye on the US in the case they release some of their strategic reserves which should be a short-term headwind for Oil. 3. Developments surrounding the global risk outlook. As a high-beta currency, the CAD benefited from the market's improving risk outlook coming out of the pandemic as participants moved out of safe-havens. As a pro-cyclical currency, the CAD enjoyed upside alongside other cyclical assets supported by reflation and post-recession recovery best. If expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the CAD in the med-term, but recent short-term jitters are a timely reminder that risk sentiment is also a very important short-term driver. 4. CFTC Analysis Latest CFTC data showed a positioning change of +842 with a net non-commercial position of +4162. With a lot of positives in the price for the CAD and the front-end yields, it is encouraging to see that positioning isn’t stretched large specs or leveraged funds. That suggests that further upside could be possible if short-term sentiment for oil and risk assets remain favourable. However, since prices do look stretched, and since JPY positioning is very net-short, any sudden risk off bouts could see some decent mean reversion opportunities in CADJPY to the downside, especially if oil prices also come under pressure as falling oil prices will be a double positive for the JPY.
by thunderpips
2