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Canadiandollar

Today’s Notable Sentiment ShiftsCAD – The Canadian dollar weakened to its lowest level in 18 months against counterpart on Tuesday as oil prices continued their decline, with WTI slipping below $100.00 per barrel. GBP – The British pound edged lower on Tuesday, heading back towards its lowest level in nearly two years on signs that a weakening economy will force the Bank of England to slow its interest rate hiking cycle. Indeed, commenting on GBP’s outlook, Caxton argues that “it’s pretty tough to be bullish sterling in the current environment… if you’re asking for a perfect mix for a weaker currency, sterling is pretty much as close as you can get to at the moment.”
by thunderpips
1
CAD JPY - FUNDAMENTAL DRIVERSCAD 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). 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 First real sign of stress for positioning for CAD as all three participant categories saw very large reductions in net-long positioning. 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 and catalysts are key. 5. The Week Ahead Oil embargo news as well as risk sentiment will be the biggest focus points for the CAD in the week ahead. On the embargo front, the recent proposals from the EU this past week was enough to see Oil push higher in the short-term, but with a lot of news arguably already in the price, and with med-term demand downside risks, the picture for oil is very messy right now. Even though the correlation between CAD and oil has been a bit hit and miss these past few weeks, any sudden moves can still affect the currency. On the risk front, 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 three trading weeks. That means overall risk sentiment will be an important driver to keep in mind for the CAD as well. JPY FUNDAMENTAL BIAS: BEARISH 1. Monetary Policy The BoJ kept all policy settings unchanged at their April meeting, which was in line with broad consensus expectations, but given the price action after the event did imply that a sizeable chunk of the market was expecting something more (us included). Due to the JPY weakness in recent weeks, markets wanted to see whether the bank would potentially increase their Yield Curve Control target band from 0.25%--0.25% to 0.50%--0.50%. But the bank decided to stick to their guns and maintain their ultra-easy policy despite the rapid depreciation of the JPY. The bank doubled down by saying they will conduct special open market operations on every working day as needed to keep the 10-year GBP capped at 0.25%. As expected, the bank reiterated their view that rates will stay low for the foreseeable future and won’t hesitate to add stimulus if the economy needs it. On the JPY, Gov Kuroda made familiar comments by saying they desire stable currency moves which reflect economic fundamentals. As a result of the bank’s inaction, all eyes will now be on the MoF to intervene if the rapid depreciation of the JPY continues. 2. Safe-haven status and overall risk outlook As a safe-haven currency, the market's risk outlook is usually the primary driver. Economic data rarely proves market moving, and although monetary policy expectations can affect the JPY in the short-term, safe-haven flows are typically more dominant. Even though the market’s overall risk tone saw a huge recovery and risk-on frenzy from the middle of 2020 to the end of 2021, recent developments have increased risks. With central banks tightening policy into an economic slowdown, risk appetite is jittery. Even though that doesn’t change our med-term bias for the JPY, it does means we should expect more risk sentiment ebbs and flows this year, and the heightened volatility can create strong directional moves in the JPY, as long as yields play their part. 3. Low-yielding currency with inverse correlation to US10Y As a low yielding currency, the JPY usually shares a strong inverse correlation to moves in US yield differentials. Like most correlations, the strength of the inverse correlation between the JPY and US10Y isn’t perfect and will ebb and flow depending on the market environment from both a risk and cycle point of view. With the Fed tilting more aggressive, we think that opens up more room for curve flattening to take place. In this environment there could be mild upside risks for the JPY if US10Y corrects, but we shouldn’t look at the yield correlation in isolation and also weigh it alongside risk sentiment and price action in other safe havens. 4. CFTC Analysis Some increase in Large Spec & Leveraged Fund net-short again, with aggregate JPY positioning still close to 2 standard deviations away from a 15-year mean. Even though the med-term outlook remains bearish , the risk to reward to chase the currency lower from here is not very attractive. 5. The Week Ahead For the week ahead, the focus will remain on the key drivers which is US10Y and more recently risk sentiment. Given the move in yield differentials and commodity prices, the JPY had very little safe haven appeal over recent weeks, but that was not the case in the past three weeks where we saw some classic risk sentiment correlations. This means, apart from the regular focus on US10Y , we’ll also be paying attention on any sharp moves in risk sentiment, especially looking towards the US CPI print. Apart from that, eyes will also be on any jawboning from Japanese officials where the BoJ has placed the ball firmly in the MoF’s court to try and curb JPY depreciation.
by thunderpips
1
USD CAD - FUNDAMENTAL DRIVERSUSD 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. 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). 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 First real sign of stress for positioning for CAD as all three participant categories saw very large reductions in net-long positioning. 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 and catalysts are key. 5. The Week Ahead Oil embargo news as well as risk sentiment will be the biggest focus points for the CAD in the week ahead. On the embargo front, the recent proposals from the EU this past week was enough to see Oil push higher in the short-term, but with a lot of news arguably already in the price, and with med-term demand downside risks, the picture for oil is very messy right now. Even though the correlation between CAD and oil has been a bit hit and miss these past few weeks, any sudden moves can still affect the currency. On the risk front, 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 three trading weeks. That means overall risk sentiment will be an important driver to keep in mind for the CAD as well.
by thunderpips
1
USDCAD: Important Decision Ahead 🇺🇸🇨🇦 Analyzing USDCAD on a weekly we may spot a classic bullish accumulation pattern: after setting a new lower low around 1.2 structure, the price bounced. The market started to coil setting two higher lows in a row respecting one horizontal supply area. Now the price is approaching that structure again. Its bullish breakout (weekly candle close above) may trigger a strong bullish rally all the way up to 1.33 level. Be prepared! ❤️If you have any questions, please, ask me in the comment section. Please, support my work with like, thank you!❤️
Long
by VasilyTrader
20
EUR-CAD Risky Short! Sell! Hello,Traders! EUR-CAD broke out of the large-scale falling wedge And we are still observing a move driven by the breakout momentum However, a pullback is coming to retest the broken level And there is a nice horizontal resistance nearby From where I think this pullback will being With the target being the local support below That confluences with the broken resistance of the wedge That has turned into the support level Sell! Like, comment and subscribe to boost your trading! See other ideas below too!
Short
by TopTradingSignals
2
CAD JPY - FUNDAMENTAL DRIVERSCAD 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). 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 First real sign of stress for positioning for CAD as all three participant categories saw very large reductions in net-long positioning. 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 and catalysts are key. 5. The Week Ahead Oil embargo news as well as risk sentiment will be the biggest focus points for the CAD in the week ahead. On the embargo front, the recent proposals from the EU this past week was enough to see Oil push higher in the short-term, but with a lot of news arguably already in the price, and with med-term demand downside risks, the picture for oil is very messy right now. Even though the correlation between CAD and oil has been a bit hit and miss these past few weeks, any sudden moves can still affect the currency. On the risk front, 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 three trading weeks. That means overall risk sentiment will be an important driver to keep in mind for the CAD as well. JPY FUNDAMENTAL BIAS: BEARISH 1. Monetary Policy The BoJ kept all policy settings unchanged at their April meeting, which was in line with broad consensus expectations, but given the price action after the event did imply that a sizeable chunk of the market was expecting something more (us included). Due to the JPY weakness in recent weeks, markets wanted to see whether the bank would potentially increase their Yield Curve Control target band from 0.25%--0.25% to 0.50%--0.50%. But the bank decided to stick to their guns and maintain their ultra-easy policy despite the rapid depreciation of the JPY. The bank doubled down by saying they will conduct special open market operations on every working day as needed to keep the 10-year GBP capped at 0.25%. As expected, the bank reiterated their view that rates will stay low for the foreseeable future and won’t hesitate to add stimulus if the economy needs it. On the JPY, Gov Kuroda made familiar comments by saying they desire stable currency moves which reflect economic fundamentals. As a result of the bank’s inaction, all eyes will now be on the MoF to intervene if the rapid depreciation of the JPY continues. 2. Safe-haven status and overall risk outlook As a safe-haven currency, the market's risk outlook is usually the primary driver. Economic data rarely proves market moving, and although monetary policy expectations can affect the JPY in the short-term, safe-haven flows are typically more dominant. Even though the market’s overall risk tone saw a huge recovery and risk-on frenzy from the middle of 2020 to the end of 2021, recent developments have increased risks. With central banks tightening policy into an economic slowdown, risk appetite is jittery. Even though that doesn’t change our med-term bias for the JPY, it does means we should expect more risk sentiment ebbs and flows this year, and the heightened volatility can create strong directional moves in the JPY, as long as yields play their part. 3. Low-yielding currency with inverse correlation to US10Y As a low yielding currency, the JPY usually shares a strong inverse correlation to moves in US yield differentials. Like most correlations, the strength of the inverse correlation between the JPY and US10Y isn’t perfect and will ebb and flow depending on the market environment from both a risk and cycle point of view. With the Fed tilting more aggressive, we think that opens up more room for curve flattening to take place. In this environment there could be mild upside risks for the JPY if US10Y corrects, but we shouldn’t look at the yield correlation in isolation and also weigh it alongside risk sentiment and price action in other safe havens. 4. CFTC Analysis Some increase in Large Spec & Leveraged Fund net-short again, with aggregate JPY positioning still close to 2 standard deviations away from a 15-year mean. Even though the med-term outlook remains bearish , the risk to reward to chase the currency lower from here is not very attractive. 5. The Week Ahead For the week ahead, the focus will remain on the key drivers which is US10Y and more recently risk sentiment. Given the move in yield differentials and commodity prices, the JPY had very little safe haven appeal over recent weeks, but that was not the case in the past three weeks where we saw some classic risk sentiment correlations. This means, apart from the regular focus on US10Y , we’ll also be paying attention on any sharp moves in risk sentiment, especially looking towards the US CPI print. Apart from that, eyes will also be on any jawboning from Japanese officials where the BoJ has placed the ball firmly in the MoF’s court to try and curb JPY depreciation.
by thunderpips
1
USD CAD - FUNDAMENTAL DRIVERSUSD 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. 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). 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 First real sign of stress for positioning for CAD as all three participant categories saw very large reductions in net-long positioning. 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 and catalysts are key. 5. The Week Ahead Oil embargo news as well as risk sentiment will be the biggest focus points for the CAD in the week ahead. On the embargo front, the recent proposals from the EU this past week was enough to see Oil push higher in the short-term, but with a lot of news arguably already in the price, and with med-term demand downside risks, the picture for oil is very messy right now. Even though the correlation between CAD and oil has been a bit hit and miss these past few weeks, any sudden moves can still affect the currency. On the risk front, 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 three trading weeks. That means overall risk sentiment will be an important driver to keep in mind for the CAD as well.
by thunderpips
CAD JPY - FUNDAMENTAL DRIVERSCAD 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). 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 First real sign of stress for positioning for CAD as all three participant categories saw very large reductions in net-long positioning. 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 and catalysts are key. 5. The Week Ahead Oil embargo news as well as risk sentiment will be the biggest focus points for the CAD in the week ahead. On the embargo front, the recent proposals from the EU this past week was enough to see Oil push higher in the short-term, but with a lot of news arguably already in the price, and with med-term demand downside risks, the picture for oil is very messy right now. Even though the correlation between CAD and oil has been a bit hit and miss these past few weeks, any sudden moves can still affect the currency. On the risk front, 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 three trading weeks. That means overall risk sentiment will be an important driver to keep in mind for the CAD as well. JPY FUNDAMENTAL BIAS: BEARISH 1. Monetary Policy The BoJ kept all policy settings unchanged at their April meeting, which was in line with broad consensus expectations, but given the price action after the event did imply that a sizeable chunk of the market was expecting something more (us included). Due to the JPY weakness in recent weeks, markets wanted to see whether the bank would potentially increase their Yield Curve Control target band from 0.25%--0.25% to 0.50%--0.50%. But the bank decided to stick to their guns and maintain their ultra-easy policy despite the rapid depreciation of the JPY. The bank doubled down by saying they will conduct special open market operations on every working day as needed to keep the 10-year GBP capped at 0.25%. As expected, the bank reiterated their view that rates will stay low for the foreseeable future and won’t hesitate to add stimulus if the economy needs it. On the JPY, Gov Kuroda made familiar comments by saying they desire stable currency moves which reflect economic fundamentals. As a result of the bank’s inaction, all eyes will now be on the MoF to intervene if the rapid depreciation of the JPY continues. 2. Safe-haven status and overall risk outlook As a safe-haven currency, the market's risk outlook is usually the primary driver. Economic data rarely proves market moving, and although monetary policy expectations can affect the JPY in the short-term, safe-haven flows are typically more dominant. Even though the market’s overall risk tone saw a huge recovery and risk-on frenzy from the middle of 2020 to the end of 2021, recent developments have increased risks. With central banks tightening policy into an economic slowdown, risk appetite is jittery. Even though that doesn’t change our med-term bias for the JPY, it does means we should expect more risk sentiment ebbs and flows this year, and the heightened volatility can create strong directional moves in the JPY, as long as yields play their part. 3. Low-yielding currency with inverse correlation to US10Y As a low yielding currency, the JPY usually shares a strong inverse correlation to moves in US yield differentials. Like most correlations, the strength of the inverse correlation between the JPY and US10Y isn’t perfect and will ebb and flow depending on the market environment from both a risk and cycle point of view. With the Fed tilting more aggressive, we think that opens up more room for curve flattening to take place. In this environment there could be mild upside risks for the JPY if US10Y corrects, but we shouldn’t look at the yield correlation in isolation and also weigh it alongside risk sentiment and price action in other safe havens. 4. CFTC Analysis Some increase in Large Spec & Leveraged Fund net-short again, with aggregate JPY positioning still close to 2 standard deviations away from a 15-year mean. Even though the med-term outlook remains bearish , the risk to reward to chase the currency lower from here is not very attractive. 5. The Week Ahead For the week ahead, the focus will remain on the key drivers which is US10Y and more recently risk sentiment. Given the move in yield differentials and commodity prices, the JPY had very little safe haven appeal over recent weeks, but that was not the case in the past three weeks where we saw some classic risk sentiment correlations. This means, apart from the regular focus on US10Y , we’ll also be paying attention on any sharp moves in risk sentiment, especially looking towards the US CPI print. Apart from that, eyes will also be on any jawboning from Japanese officials where the BoJ has placed the ball firmly in the MoF’s court to try and curb JPY depreciation.
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USD CAD - FUNDAMENTAL DRIVERSUSD 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. 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). 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 First real sign of stress for positioning for CAD as all three participant categories saw very large reductions in net-long positioning. 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 and catalysts are key. 5. The Week Ahead Oil embargo news as well as risk sentiment will be the biggest focus points for the CAD in the week ahead. On the embargo front, the recent proposals from the EU this past week was enough to see Oil push higher in the short-term, but with a lot of news arguably already in the price, and with med-term demand downside risks, the picture for oil is very messy right now. Even though the correlation between CAD and oil has been a bit hit and miss these past few weeks, any sudden moves can still affect the currency. On the risk front, 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 three trading weeks. That means overall risk sentiment will be an important driver to keep in mind for the CAD as well.
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