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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 Aggregate positioning was bullish yet again, but not as bullish as the prior week. We also started to see a first possibly sign that price action could have reached a bit of a top after recent BoC news have been priced in. 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’re waiting for deeper pullbacks in AUDCAD & USDCAD for long opportunities. 5. The Week Ahead It’s a very light econ calendar for Canada this week, which means risk sentiment and WTI will be interesting drivers to watch. The correlation between WTI and CAD has been mostly hit and miss over the past couple of weeks, but that doesn’t mean we should ignore Oil’s potential impact on CAD price action. Thus, the energy market will be in focus as usual where any oil-positive developments could support the CAD while any oilnegative news could pressure the CAD. As for risk sentiment, it’s interesting that the only high-beta major that held up okay last week despite risk off tones was the CAD. We’re not sure what to make of that right now, but know that if market sentiment deteriorates enough, that the CAD will not be able to stay immune to that. JPY FUNDAMENTAL BIAS: BEARISH 1. Monetary Policy No surprises from the BoJ at their March meeting. As usual, the BoJ continued their three decade long easy policy with Governor Kuroda dismissing any chances of starting to debate an exit from the current policy stance. The language and tone were very similar to their prior meeting where the bank remained committed to provide any additional easing if necessary and noted that the current geopolitical situation increases the risks and uncertainty for Japan’s economy. The bank did note that they expect inflation to rise to close to 2% in Q2 as a result of the recent upside in oil prices, but the governor did explain that recent fears of stagflation in places like Japan, EU and US are overdone. Furthermore, Governor Kuroda explained that rates in Japan will remain low and the rate differential between Japan and other major economies are expected to lead to a weaker currency and higher domestic price pressures in the months ahead. 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 Bearish bets continued to ease up a bit with recent positioning data. However, positioning is still very stretched with aggregate JPY positioning close to 2 standard deviations away from a 15-year mean. Even though the medterm outlook remain bearish , the risk to reward to chase the currency lower from here is not very attractive. 5. The Week Ahead This week will be all about the BoJ and possible intervention comments from Japanese officials. For the BoJ, the question markets have is whether the recent weakness of the JPY has been enough to spark some potential reaction from the BoJ, either in the form of verbal intervention (talking down the weakness and/or threatening FX intervention – this past seems unlikely given that the finance minister looks to be heading that part of the equation). So, the only other thing the bank can realistically do to ease off some of the pressure by increasing the target band of the JP10Y from -0.25%-0.25% to -0.50%-0.50%. This would not only ease some of the continued pressure from the markets around the YCC, and it should also provide some short-term relief for the JPY weakness. Then there is also possible jawboning, where Finance Minister Suzuki and US Treasury Sec Yellen talked about the possibility of joint FX intervention where the US showed willingness in the proposal (something they are usually less keen on entertaining).
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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 It’s taken many weeks of stretched positioning, but AUD net-shorts have continued to unwind and have moved out of stretched territory. 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 main focus for the AUD in the week ahead will be QQ CPI data, China developments and commodities . For the QQ CPI , market consensus is expecting quite a jump with YY headline seen at 4.6% from 3.5%, with both the Trim and Weighted YY measures both seen comfortably above 3%. This supports the idea that the RBA will be looking raise rates at upcoming meetings by stating that inflation developments have brought forward the likely timing of a first hike. However, whether a beat or not, the most likely scenario for lift off remains in June. On China’s side, markets will be watching Caixin PMI as well as the Covid situation (what’s good or bad for China usually spills over into the AUD so pay attention to that). 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. However, it is important to note that the AUD exhibited very ‘traditional’ risk sensitivity to equity markets last week, which suggests overall risk sentiment might be coming back into focus for the Antipodean. 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 Aggregate positioning was bullish yet again, but not as bullish as the prior week. We also started to see a first possibly sign that price action could have reached a bit of a top after recent BoC news have been priced in. 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’re waiting for deeper pullbacks in AUDCAD & USDCAD for long opportunities. 5. The Week Ahead It’s a very light econ calendar for Canada this week, which means risk sentiment and WTI will be interesting drivers to watch. The correlation between WTI and CAD has been mostly hit and miss over the past couple of weeks, but that doesn’t mean we should ignore Oil’s potential impact on CAD price action. Thus, the energy market will be in focus as usual where any oil-positive developments could support the CAD while any oilnegative news could pressure the CAD. As for risk sentiment, it’s interesting that the only high-beta major that held up okay last week despite risk off tones was the CAD. We’re not sure what to make of that right now, but know that if market sentiment deteriorates enough, that the CAD will not be able to stay immune to that.
by thunderpips
2
NZD CAD - FUNDAMENTAL DRIVERSNZD FUNDAMENTAL BIAS: BULLISH 1. Monetary Policy At their April meeting the RBNZ surprise economists but not STIR markets by delivering a 50bsp hike, taking the OCR to 1.50%. The bank stressed, like most others, that inflation is a concern and that they will ensure that higher price pressures don’t become embedded in longer-term inflation expectations. The NZD initially pushed higher after the 50bsp hike (surprising economists) but it faded initial strength to trade much lower (as a 50bsp was almost fully priced by STIR markets). The statement reflected the hawkish tone we’ve grown accustomed to see from the bank over the past few months with the Committee saying they agreed that their policy ‘path of least regrets’ was to increase the OCR by 50bsp now rather than later, and of course stated that more hikes are needed (in line with their OCR projections). The one less hawkish element for the decision was that the bank didn’t increase their neutral rate expectations and instead said they are comfortable with their February MPS OCR outlook. The markets wanted to see a clear promise of more 50bsp hikes or alternatively wanted to see an increase of the neutral rate expectations, and without either of those the 50bsp hike was simply seen as front-loading. As a result of this, money markets were pricing in just a 25bsp for May for the majority of Wednesday. But after calls from Westpac, ASB and Kiwibank for a 50bsp in May we saw the NZD regain some composure on Thursday as STIR markets priced in a 60% chance of a 50bsp hike. The RBNZ remain hawkish, but a lot of that is arguably priced in and might not continue to offer much more support for the NZD. 2. Economic outlook The econ outlook looks solid as growth & inflation is expected to accelerate, home prices up 30%, commodity prices supported, and a ratified trade deal with China (opening more Chinese markets for NZ goods). Given it’s trade with China and Australia the recent Covid situation in China is a short-term negative for the NZD. 3. Global Risk Outlook As a high-beta currency, the NZD 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 NZD. 4. CFTC Analysis Most recent positioning data for the NZD was mostly a mixed bag with no major bullish or bearish signals to take from it with positioning remaining close to neutral across participant categories. With a lot of one-sided upside in recent weeks some mean reversion makes sense, especially with the current Covid situation getting worse in China, and the correlation to equities last week showing some traditional risk sensitivity for the NZD. 5. The Week Ahead For the week ahead it’s a very light econ calendar for the NZD with no major events to keep on the radar. That means short-term concerns regarding China might be the bigger driver for the NZD as well as the AUD in the week ahead. For China, the covid situation will be in focus, as well as any potential stimulus promises as well as the incoming Caixin PMI on Friday. 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 Aggregate positioning was bullish yet again, but not as bullish as the prior week. We also started to see a first possibly sign that price action could have reached a bit of a top after recent BoC news have been priced in. 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’re waiting for deeper pullbacks in AUDCAD & USDCAD for long opportunities. 5. The Week Ahead It’s a very light econ calendar for Canada this week, which means risk sentiment and WTI will be interesting drivers to watch. The correlation between WTI and CAD has been mostly hit and miss over the past couple of weeks, but that doesn’t mean we should ignore Oil’s potential impact on CAD price action. Thus, the energy market will be in focus as usual where any oil-positive developments could support the CAD while any oilnegative news could pressure the CAD. As for risk sentiment, it’s interesting that the only high-beta major that held up okay last week despite risk off tones was the CAD. We’re not sure what to make of that right now, but know that if market sentiment deteriorates enough, that the CAD will not be able to stay immune to that.
by thunderpips
2
EUR CAD - FUNDAMENTAL DRIVERSEUR FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy The ECB used the April meeting as a place holder meeting for the most part by not announcing any additional policy tweaks. The plans to phase out the APP into Q3 remained intact by reducing purchases from 40bln to 30bln in May and then down to 20bln in June. Markets were leaning towards a slightly more hawkish take from the bank (given recent inflation pressures), but the lack of conviction to remove the conditionality regarding the APP removal was seen as dovish. President Lagarde added to this dovish tone by explaining that Q3 has three months and IF the bank stops the APP, it could happen July, August or September. This was an important statement as the difference between a July and September end could mean the difference between a Q3 or Q4 rate hike. The president also added to the dovish tone by stressing that risks for the economic outlook are tilted to the downside and have recently intensified with geopolitical and virus-related challenges. When asked about policy normalization, the president made a strange comment by saying it is premature to think about monpol normalisation. As the bank is currently embarking on normalization this comment seemed out of place and reaffirmed the overall dovish take from the meeting. There were the usual sources releases after the presser which said policymakers see a July hike as still possible after Thursday's meeting, which provided some reprieve. With inflation >7% and growth slowing, the June meeting which accompanies staff economic projections will be critical for markets to solidify whether expectations of 1 or 2 hikes this year is correct or not. 2. Economic & Health Developments Growth differentials still favour the US over EU capital flows, but differentials have turned positive against the UK. Given growing stagflation fears the ECB is in a tough spot, being forced to normalize policy to try and combat inflation but could as a result damage growth. Ongoing EU fiscal discussions to possibly allow ‘green bonds’ NOT to count against budget deficits remains in focus, alongside debt issuance for energy purchases. If approved, it will offer a flood of fiscal support which would be positive for the EUR and EU equities. Geopolitics The EUR pushed lower aggressively after initial geopolitical scares but have been trying to carve out a base. Proximity to the war and the impact of sanctions remains a risk if the situation deteriorates. With lots of negatives already priced, chasing lows on bad news is not as attractive as chasing the EUR higher on good news. 3. CFTC Analysis After chunky increase in long exposure with the previous CFTC report, Friday’s data showed the exact opposite with a chunky drop for Large Specs and Leveraged Funds. Even though aggregate positioning is close to 1 standard deviation above the mean, the price action in recent weeks does not reflect that view right now. 4. The Week Ahead One of the weekend risks for the EUR was the French elections, which ended up as expected with a victory for current President Macron. This is a positive for the EUR, but since this was the expected outcome and since the EUR got a bit of a shot in the arm from last week’s hawkish ECB remarks, we are note expecting anything special from the French election outcome. The main econ highlights this week will be EU Flash HICP data coming up on Friday. After last month’s big jump in YY HICP from 5.9% to 7.4% the upcoming print is expected to be less dramatic with consensus looking for a move to 7.5%. However, some firms suggest that food prices and utility costs (which is seeing in renegotiations) still puts upside risks to the print. After last week’s hawkish ECB comments, the HICP will be watched closely as a miss could ease up some of last week’s rates pressures, while a solid beat should just reinforce expectations of a possibly 25bsp hike as early as July. Geopolitics will also be in focus, where Finland and Sweden’s attempts to join NATO could spark aggressive reactions from Russia (any threats from Russia could see markets pricing in a bigger risk premium for the EUR). We also need to keep energy in mind where the possibility of energy embargos on Russian oil and gas will be key to watch as well. 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 Aggregate positioning was bullish yet again, but not as bullish as the prior week. We also started to see a first possibly sign that price action could have reached a bit of a top after recent BoC news have been priced in. 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’re waiting for deeper pullbacks in AUDCAD & USDCAD for long opportunities. 5. The Week Ahead It’s a very light econ calendar for Canada this week, which means risk sentiment and WTI will be interesting drivers to watch. The correlation between WTI and CAD has been mostly hit and miss over the past couple of weeks, but that doesn’t mean we should ignore Oil’s potential impact on CAD price action. Thus, the energy market will be in focus as usual where any oil-positive developments could support the CAD while any oilnegative news could pressure the CAD. As for risk sentiment, it’s interesting that the only high-beta major that held up okay last week despite risk off tones was the CAD. We’re not sure what to make of that right now, but know that if market sentiment deteriorates enough, that the CAD will not be able to stay immune to that.
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4
USD CAD - FUNDAMENTAL DRIVERSUSD 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 It will be another light econ week for the USD with Friday offering the highlights with Core PCE (the Fed’s preferred measure of inflation) and the Employment Cost Index. After the surprise drop in Core CPI for March, the markets will be keenly watching PCE data to see whether the calls for ‘peak inflation’ is materializing in more data releases. Furthermore, and sticking to the inflation narrative, the Employment Cost index will be closely watched given its importance in ‘second-round effects’. Given what has already been priced in for the Fed (backto-back 50bsp hikes with earlier QT) a miss in both data points could add further fuel to the ‘peak inflation’ calls and could be enough to see some current USD bulls take some profit as we have reached yet another new cycle high in the past week and are trading close to key 2020 resistance levels As a growth hedge, the current environment of slowing growth and a hawkish Fed bodes well for the USD, which means the med-term bullish bias remains intact, but the risk to reward of chasing it at the highs is not very attractive right now, and means patience is not a bad idea in the short-term. 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 Aggregate positioning was bullish yet again, but not as bullish as the prior week. We also started to see a first possibly sign that price action could have reached a bit of a top after recent BoC news have been priced in. 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’re waiting for deeper pullbacks in AUDCAD & USDCAD for long opportunities. 5. The Week Ahead It’s a very light econ calendar for Canada this week, which means risk sentiment and WTI will be interesting drivers to watch. The correlation between WTI and CAD has been mostly hit and miss over the past couple of weeks, but that doesn’t mean we should ignore Oil’s potential impact on CAD price action. Thus, the energy market will be in focus as usual where any oil-positive developments could support the CAD while any oilnegative news could pressure the CAD. As for risk sentiment, it’s interesting that the only high-beta major that held up okay last week despite risk off tones was the CAD. We’re not sure what to make of that right now, but know that if market sentiment deteriorates enough, that the CAD will not be able to stay immune to that.
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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 It’s taken many weeks of stretched positioning, but AUD net-shorts have continued to unwind and have moved out of stretched territory. 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 main focus for the AUD in the week ahead will be QQ CPI data, China developments and commodities. For the QQ CPI, market consensus is expecting quite a jump with YY headline seen at 4.6% from 3.5%, with both the Trim and Weighted YY measures both seen comfortably above 3%. This supports the idea that the RBA will be looking raise rates at upcoming meetings by stating that inflation developments have brought forward the likely timing of a first hike. However, whether a beat or not, the most likely scenario for lift off remains in June. On China’s side, markets will be watching Caixin PMI as well as the Covid situation (what’s good or bad for China usually spills over into the AUD so pay attention to that). 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. However, it is important to note that the AUD exhibited very ‘traditional’ risk sensitivity to equity markets last week, which suggests overall risk sentiment might be coming back into focus for the Antipodean. 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 Aggregate positioning was bullish yet again, but not as bullish as the prior week. We also started to see a first possibly sign that price action could have reached a bit of a top after recent BoC news have been priced in. 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’re waiting for deeper pullbacks in AUDCAD & USDCAD for long opportunities. 5. The Week Ahead It’s a very light econ calendar for Canada this week, which means risk sentiment and WTI will be interesting drivers to watch. The correlation between WTI and CAD has been mostly hit and miss over the past couple of weeks, but that doesn’t mean we should ignore Oil’s potential impact on CAD price action. Thus, the energy market will be in focus as usual where any oil-positive developments could support the CAD while any oilnegative news could pressure the CAD. As for risk sentiment, it’s interesting that the only high-beta major that held up okay last week despite risk off tones was the CAD. We’re not sure what to make of that right now, but know that if market sentiment deteriorates enough, that the CAD will not be able to stay immune to that.
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EUR CAD - FUNDAMENTAL DRIVERSEUR FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy The ECB used the April meeting as a place holder meeting for the most part by not announcing any additional policy tweaks. The plans to phase out the APP into Q3 remained intact by reducing purchases from 40bln to 30bln in May and then down to 20bln in June. Markets were leaning towards a slightly more hawkish take from the bank (given recent inflation pressures), but the lack of conviction to remove the conditionality regarding the APP removal was seen as dovish. President Lagarde added to this dovish tone by explaining that Q3 has three months and IF the bank stops the APP, it could happen July, August or September. This was an important statement as the difference between a July and September end could mean the difference between a Q3 or Q4 rate hike. The president also added to the dovish tone by stressing that risks for the economic outlook are tilted to the downside and have recently intensified with geopolitical and virus-related challenges. When asked about policy normalization, the president made a strange comment by saying it is premature to think about monpol normalisation. As the bank is currently embarking on normalization this comment seemed out of place and reaffirmed the overall dovish take from the meeting. There were the usual sources releases after the presser which said policymakers see a July hike as still possible after Thursday's meeting, which provided some reprieve. With inflation >7% and growth slowing, the June meeting which accompanies staff economic projections will be critical for markets to solidify whether expectations of 1 or 2 hikes this year is correct or not. 2. Economic & Health Developments Growth differentials still favour the US over EU capital flows, but differentials have turned positive against the UK. Given growing stagflation fears the ECB is in a tough spot, being forced to normalize policy to try and combat inflation but could as a result damage growth. Ongoing EU fiscal discussions to possibly allow ‘green bonds’ NOT to count against budget deficits remains in focus, alongside debt issuance for energy purchases. If approved, it will offer a flood of fiscal support which would be positive for the EUR and EU equities. Geopolitics The EUR pushed lower aggressively after initial geopolitical scares but have been trying to carve out a base. Proximity to the war and the impact of sanctions remains a risk if the situation deteriorates. With lots of negatives already priced, chasing lows on bad news is not as attractive as chasing the EUR higher on good news. 3. CFTC Analysis Quite a chunky increase in long exposure from Large Specs and Leveraged Funds while Asset Managers reduced long exposure. With aggregate positioning close to 1 standard deviation above the mean positioning might look stretched, but relative to where we were coming from positioning is more bullish than bearish right now. 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 Another bullish positioning signal with the recent positioning update. With Asset Manager net-longs still in the top 80 percentile 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’re waiting for deeper pullbacks in AUDCAD & USDCAD for long opportunities.
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USD CAD - FUNDAMENTAL DRIVERSUSD 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. 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 Another bullish positioning signal with the recent positioning update. With Asset Manager net-longs still in the top 80 percentile 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’re waiting for deeper pullbacks in AUDCAD & USDCAD for long opportunities.
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