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USDCAD Clear Channel Down until its invalidatedTime to update my USDCAD outlook made a month ago: As you see the Channel Down eventually prevailed and the divergence was created as the condition I set (breaking the dashed Lower Highs trend-line) was not fulfilled. The price is now testing the 1D MA50 (blue trend-line). A break above still has to overcome the top (Lower Highs) trend-line of the Channel Down. The RSI is also under Lower Highs pressure. A rejection there or on the 1D MA50, will extend the Channel Down pattern and the natural target will be the 1.22875 October 21 Low, currently the Support. A break above the Channel Down will be enough to restore the bullish trend on the long-term horizon, targeting the 1.33880 Resistance (October 29 2020 High). -------------------------------------------------------------------------------------------------------- Please like, subscribe and share your ideas and charts with the community! --------------------------------------------------------------------------------------------------------
Short
by TradingShot
2
CAD JPY - FUNDAMENTAL DRIVERSCAD FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy The BoC did not surprise at their March meeting by hiking rates to 0.50% from 0.25% and continuing the reinvestment phase regarding asset purchases. The bank noted that the Russia/Ukraine war was a new major uncertainty for the economy and that as a result inflation is now expected to be higher in the near-term. They were optimistic about the growth outlook though and reiterated that it expects further interest rate rises will be needed. On the QT side, Gov Macklem noted that around 40% of the bank's bond holdings were due to mature within two years, and suggested that balance sheet could shrink quickly, and also added that they will discuss ending the reinvestment phase and starting QT at the April meeting. The Governor also said he didn’t rule out the potential for 50bsp rate rises as oil is putting upside pressure on CPI , noting that oil prices around $110 per barrel could add another percentage point to inflation . With markets implying close to another 8 hikes this year, we remain cautious on the currency as a slowing US and Canadian economy means the bank could struggle to maintain its current hawkish path in the weeks and months ahead. 2. Intermarket Analysis Considerations Oil’s impressive post-covid recovery has been driven by many factors such as supply & demand , global demand recovery, and more recently geopolitical concerns. At current prices the risk to demand destruction and stagflation is high, which means we remain cautious of oil in the med-term . Reason for caution: Synchronised policy tightening targeting demand, slowing growth, consensus longs, steep backwardation curve, heightened implied volatility . We remain cautious oil , but geopolitics remain a key driver and focus for Petro-currencies like the CAD (even though the CAD-Oil correlation has been hit and miss). 3. Global Risk Outlook As a high-beta currency, the CAD usually benefits from overall positive risk sentiment as well as environments that benefit pro-cyclical assets. Thus, both short-term (immediate) and med-term (underlying) risk sentiment will always be a key consideration for the CAD. 4. CFTC Analysis Another very bullish positioning signal with Large Specs and Asset Managers increasing longs and Leverage Funds decreasing shorts. With Asset Manager net-longs reaching top 80 percentile levels (2007 base year) we think markets are setting up a similar path compared to April 2021, Oct 2021 and Jan 2022 where markets were too aggressive to price in CAD upside only to see majority of it unwind later. For now, timing is very important, and we’ll wait for a potential hawkish BoC to use outsized strength for AUDCAD & USDCAD long opportunities. 5. The Week Ahead Hoping for a hawkish BoC and a 50bsp but not for buying opportunities in the CAD. Following decent economic data as well as comments from BoC’s Kozicki (who said the bank will be 'forceful' to fight ‘hot’ inflation ) markets are pricing in close to a 90% chance of a 50bsp hike for this week’s meeting. At their previous meeting, Governor Macklem explained that starting QT would be the logical next step for policy, which means a QT announcement is also on the card and in line with consensus expectations. Given our med-term neutral outlook for the CAD, we are hoping for a hawkish BoC that not only delivers on a 50bsp hike as well as a QT start, but also providing signals of another 50bsp in June. The faster the market moves to price in another 50bsp hike as well as QT, the faster we’ll get to a peak hawkishness scenario. With >9 hikes expected by the end of 2022, a market that fully prices in another 50bsp hike after a hawkish BoC will such a lot of buyers in at the highs and when markets start repricing the curve lower that will set up good shorting opportunities against the CAD. 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, but we should not look at the influence from yields in isolation and also weigh it up alongside underlying risk sentiment and price action in other safe havens. 4. CFTC Analysis Another increase in net-shorts for Large Specs & Leveraged Funds while Asset Managers trimmed some shorts, but net shorts for all three participant categories remain in the bottom 20% of lows going back to 2008. Even though the JPY’s med-term outlook remains bearish, the recent downside in price and increased net-shorts increases odds of punchy mean reversion with equities, US10Y and oil in focus. 5. The Week Ahead New Japan fiscal year, US yields and jawboning will be key focus points next week. After the big flush lower in the JPY in recent weeks, there is some question markets over how much part the Japanese fiscal year end played, and now that a new year has started whether that leads to some JPY repatriation. On the yield side, our med-term bias remains bearish on yields given the slowdown we’ve seen in growth data from the US, but with inflation expected to reach close to 9% the inflation story has been in the driver seat. That means, US CPI will be an important focus point for the JPY this week. After the big dip in the JPY, we’ve had numerous official chime in about the weakness, and even though they didn’t exactly push back against it, they’ve clearly taken notice. The bad attention does make any moves into the 130 for USDJPY both interesting and risky for bulls, so watching for further jawboning from Japanese officials will be on the radar as well. On the energy front, it’s important to keep in mind that Japan imports more than 90% of its energy consumption, and research from JP Morgan suggests that a WTI price of $150 could erode Japan’s current account surplus (which is one of the reasons the currency enjoys safe haven appeal), which means yields and oil remain very important drivers.
by thunderpips
1
AUD CAD - FUNDAMENTAL DRIVERSAUD FUNDAMENTAL BIAS: WEAK BULLISH 1. Monetary Policy At their April meeting, the RBA took a slightly more hawkish stance by removing their reference to ‘patience’ in terms of policy tightening. With the bank taking a sanguine view of rising price pressures, the statement did reveal a growing concern for inflation with 10 references to ‘inflation’ in the statement. The bank explained that higher energy and commodity price could see a sizeable increase to inflation forecasts in the May report. In their Financial Stability report the bank urged borrowers to prepare for an increase in rates, which was a further signal from the bank. Even though the meeting showed a bank that is turning the page, the statement also revealed very similar conditionality such as incoming wage and inflation data. Following the meeting, markets have a bit of an overreaction by pricing in a >80% chance of a rate hike at the May meeting but was later pushed back to <30%. Given the importance of wage data, and since that is only release on the 18th of May, the most likely meeting for a first hike is the June meeting. Westpac investment bank agrees with our take with the bank expecting a 15bsp lift off in June, followed by 25bsp hikes in July, August, Oct and Nov. Even though this confirms our fundamental bullish bias, the >14 hikes priced by end 2023 means risks of lower repricing is building. 2. Idiosyncratic Drivers & Intermarket Analysis Apart from the RBA, there are 3 drivers we’re watching for the med-term outlook: Recovery – unlike other nations where growth & inflation is expected to slow, Australia is expected to see a solid recovery, also thanks to expected recovery in China China – With the PBoC stepping up stimulus & expectations of further fiscal support in 1H22, the projected recovery in China bodes well for Australia as China makes up close to 40% of Australian exports. It also means the growing virus cases and lockdowns and subsequent miss in recent Chinese PMI data does pose short-term downside risks for AUD. The AUKUS defence pact could see retaliation against Aussie goods and is worth keeping on the radar as well Commodities – Iron Ore (31%), Coal (14%) and LNG (10%) is more than 50% of Aussie exports, and rising prices has seen huge support for AUD on the terms of trade boost. If commodities remain supported it remains a support for AUD, but of course also means any sizeable corrections would weigh on the AUD, which means geopolitical and China demand developments are important. 3. Global Risk Outlook As a high-beta currency, the AUD usually benefits from overall positive risk sentiment as well as environments that benefit pro-cyclical assets. Thus, both short-term (immediate) and med-term (underlying) risk sentiment will always be a key consideration for the AUD. 4. CFTC Analysis It’s taken many weeks of stretched positioning, but AUD net-shorts have continued to unwind and have moved out of stretched territory with the recent CFTC data update. After a decent run higher, price action has been looking stretched, which means we’ll prefer deeper pullbacks before initiating new med-term AUD longs. 5. The Week Ahead The jobs report will be the highlight for Aussie data this week. Markets are not expecting a monster print but forecasting enough employment gains to push the Unemployment Rate below 3.9% (close to record lows of 3.8%). At this stage in the game, it’s unlikely that either a miss or a beat would change anything for the rate outlook as markets already pushed back unrealistic rate expectations for a May hike to June. Given stretched pricing for the AUDCAD, a miss would suite our bias well if it can be accompanied by a hawkish BoC as that could provide us with a decent pullback to buy back at more attractive levels. Apart from the RBA focus will also be on China and commodities. Any further stimulus promises or measures from China will be important. For commodities, the geopolitical tensions have seen commodity prices surge and have given Australia’s terms of trade a solid boost. As commodities have been supported by geopolitical stress and stimulus hopes from China, anything that dents that optimism and sees mean reversion in commodities will be important to watch for the AUD. This also means that the AUD might counterintuitively trade mixed on geopolitical de-escalations depending on how commodities react. CAD FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy The BoC did not surprise at their March meeting by hiking rates to 0.50% from 0.25% and continuing the reinvestment phase regarding asset purchases. The bank noted that the Russia/Ukraine war was a new major uncertainty for the economy and that as a result inflation is now expected to be higher in the near-term. They were optimistic about the growth outlook though and reiterated that it expects further interest rate rises will be needed. On the QT side, Gov Macklem noted that around 40% of the bank's bond holdings were due to mature within two years, and suggested that balance sheet could shrink quickly, and also added that they will discuss ending the reinvestment phase and starting QT at the April meeting. The Governor also said he didn’t rule out the potential for 50bsp rate rises as oil is putting upside pressure on CPI , noting that oil prices around $110 per barrel could add another percentage point to inflation . With markets implying close to another 8 hikes this year, we remain cautious on the currency as a slowing US and Canadian economy means the bank could struggle to maintain its current hawkish path in the weeks and months ahead. 2. Intermarket Analysis Considerations Oil’s impressive post-covid recovery has been driven by many factors such as supply & demand , global demand recovery, and more recently geopolitical concerns. At current prices the risk to demand destruction and stagflation is high, which means we remain cautious of oil in the med-term . Reason for caution: Synchronised policy tightening targeting demand, slowing growth, consensus longs, steep backwardation curve, heightened implied volatility . We remain cautious oil , but geopolitics remain a key driver and focus for Petro-currencies like the CAD (even though the CAD-Oil correlation has been hit and miss). 3. Global Risk Outlook As a high-beta currency, the CAD usually benefits from overall positive risk sentiment as well as environments that benefit pro-cyclical assets. Thus, both short-term (immediate) and med-term (underlying) risk sentiment will always be a key consideration for the CAD. 4. CFTC Analysis Another very bullish positioning signal with Large Specs and Asset Managers increasing longs and Leverage Funds decreasing shorts. With Asset Manager net-longs reaching top 80 percentile levels (2007 base year) we think markets are setting up a similar path compared to April 2021, Oct 2021 and Jan 2022 where markets were too aggressive to price in CAD upside only to see majority of it unwind later. For now, timing is very important, and we’ll wait for a potential hawkish BoC to use outsized strength for AUDCAD & USDCAD long opportunities. 5. The Week Ahead Hoping for a hawkish BoC and a 50bsp but not for buying opportunities in the CAD. Following decent economic data as well as comments from BoC’s Kozicki (who said the bank will be 'forceful' to fight ‘hot’ inflation ) markets are pricing in close to a 90% chance of a 50bsp hike for this week’s meeting. At their previous meeting, Governor Macklem explained that starting QT would be the logical next step for policy, which means a QT announcement is also on the card and in line with consensus expectations. Given our med-term neutral outlook for the CAD, we are hoping for a hawkish BoC that not only delivers on a 50bsp hike as well as a QT start, but also providing signals of another 50bsp in June. The faster the market moves to price in another 50bsp hike as well as QT, the faster we’ll get to a peak hawkishness scenario. With >9 hikes expected by the end of 2022, a market that fully prices in another 50bsp hike after a hawkish BoC will such a lot of buyers in at the highs and when markets start repricing the curve lower that will set up good shorting opportunities against the CAD.
by thunderpips
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 Friday’s CFTC update had mixed changes with no clear sentiment shifts. Large Specs increased net longs while Leveraged Funds reducing recent net-shorts. Asset Managers slightly trimmed net longs but with Asset Manager longs in top 80 percentile going back to 2007 some unwind is to be expected at some stage. 4. The Week Ahead Inflation, Retail Sales and Industrial Production will be in focus for the USD in the week ahead. The focus for the USD with the incoming data points this week will fall to the growth side. With close to 9 and an earlier start to QT priced in, the odds of an upside surprise to inflation providing policy-inspired upside is looking thin, but if an upside surprise starts to spark more growth concerns that could give the USD another lift. In the off chance that inflation surprises to the downside, the stretched upside we’ve seen in the USD alongside recent policy expectations could see some decent downside in the USD. But chances of a surprise lower seem very unlikely, but also means that the reaction could be exacerbated given the one-side expectations for higher inflation in. That also means that Retail Sales and Industrial Production will once again be in focus where both data points have been showing signs of faster deceleration with recent prints. The focus here for the USD will once again be on the growth side, where another faster-than-expected slowdown could be supportive for the USD given its usual inverse correlation to global growth expectations. In the event that Retail Sales and Industrial Production surprise higher, we should not be surprised if we see the USD push lower afterwards, but we should also not get complacent in the growth-inspired reactions in the USD given how stretched prices have been. CAD FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy The BoC did not surprise at their March meeting by hiking rates to 0.50% from 0.25% and continuing the reinvestment phase regarding asset purchases. The bank noted that the Russia/Ukraine war was a new major uncertainty for the economy and that as a result inflation is now expected to be higher in the near-term. They were optimistic about the growth outlook though and reiterated that it expects further interest rate rises will be needed. On the QT side, Gov Macklem noted that around 40% of the bank's bond holdings were due to mature within two years, and suggested that balance sheet could shrink quickly, and also added that they will discuss ending the reinvestment phase and starting QT at the April meeting. The Governor also said he didn’t rule out the potential for 50bsp rate rises as oil is putting upside pressure on CPI, noting that oil prices around $110 per barrel could add another percentage point to inflation. With markets implying close to another 8 hikes this year, we remain cautious on the currency as a slowing US and Canadian economy means the bank could struggle to maintain its current hawkish path in the weeks and months ahead. 2. Intermarket Analysis Considerations Oil’s impressive post-covid recovery has been driven by many factors such as supply & demand, global demand recovery, and more recently geopolitical concerns. At current prices the risk to demand destruction and stagflation is high, which means we remain cautious of oil in the med-term. Reason for caution: Synchronised policy tightening targeting demand, slowing growth, consensus longs, steep backwardation curve, heightened implied volatility. We remain cautious oil, but geopolitics remain a key driver and focus for Petro-currencies like the CAD (even though the CAD-Oil correlation has been hit and miss). 3. Global Risk Outlook As a high-beta currency, the CAD usually benefits from overall positive risk sentiment as well as environments that benefit pro-cyclical assets. Thus, both short-term (immediate) and med-term (underlying) risk sentiment will always be a key consideration for the CAD. 4. CFTC Analysis Another very bullish positioning signal with Large Specs and Asset Managers increasing longs and Leverage Funds decreasing shorts. With Asset Manager net-longs reaching top 80 percentile levels (2007 base year) we think markets are setting up a similar path compared to April 2021, Oct 2021 and Jan 2022 where markets were too aggressive to price in CAD upside only to see majority of it unwind later. For now, timing is very important, and we’ll wait for a potential hawkish BoC to use outsized strength for AUDCAD & USDCAD long opportunities. 5. The Week Ahead Hoping for a hawkish BoC and a 50bsp but not for buying opportunities in the CAD. Following decent economic data as well as comments from BoC’s Kozicki (who said the bank will be 'forceful' to fight ‘hot’ inflation) markets are pricing in close to a 90% chance of a 50bsp hike for this week’s meeting. At their previous meeting, Governor Macklem explained that starting QT would be the logical next step for policy, which means a QT announcement is also on the card and in line with consensus expectations. Given our med-term neutral outlook for the CAD, we are hoping for a hawkish BoC that not only delivers on a 50bsp hike as well as a QT start, but also providing signals of another 50bsp in June. The faster the market moves to price in another 50bsp hike as well as QT, the faster we’ll get to a peak hawkishness scenario. With >9 hikes expected by the end of 2022, a market that fully prices in another 50bsp hike after a hawkish BoC will such a lot of buyers in at the highs and when markets start repricing the curve lower that will set up good shorting opportunities against the CAD.
by thunderpips
USD possible strength, CAD weaknessTechnical: Bottoming pattern. Volatility is increasing (ATR). Nice triangle too (check the chart down below), it's not in a trend but it has to break at some point right? This may happen soon (in the coming weeks). Oil is falling, in a C leg now (or could end up being a double bottom). And the USD index is about to break 100 for the first time in 2 years. The BOC and the FED are both going to raise rates in the coming months. My posts are probably going to be shorter now. Can't spend 10 hours a day writting a history book about the history of derivatives anymore. Also I am worried I won't see the time fly by, and I'll lose my focus. Got to learn to code (I already know how to but I can always learn more), it's a waste not to get a ROI out of my abilities. Trading is pretty repetitive at some point, I don't need to do much honestly.
Long
by MrRenev
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 The USD’s med-term bias remains bullish but positioning for large specs and asset managers are close to multiyear highs. That always increases risks of short-term corrections against the underlying trend. As the med-term bias is still bullish we don’t want to necessarily sell the USD into a slowing growth environment (see notes above), so we could rather opt to buy it versus weaker currencies which also seems stretched long (CAD comes to mind). CAD FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy The BoC did not surprise at their March meeting by hiking rates to 0.50% from 0.25% and continuing the reinvestment phase regarding asset purchases. The bank noted that the Russia/Ukraine war was a new major uncertainty for the economy and that as a result inflation is now expected to be higher in the near-term. They were optimistic about the growth outlook though and reiterated that it expects further interest rate rises will be needed. On the QT side, Gov Macklem noted that around 40% of the bank's bond holdings were due to mature within two years, and suggested that balance sheet could shrink quickly, and also added that they will discuss ending the reinvestment phase and starting QT at the April meeting. The Governor also said he didn’t rule out the potential for 50bsp rate rises as oil is putting upside pressure on CPI , noting that oil prices around $110 per barrel could add another percentage point to inflation . With markets implying close to another 8 hikes this year, we remain cautious on the currency as a slowing US and Canadian economy means the bank could struggle to maintain its current hawkish path in the weeks and months ahead. 2. Intermarket Analysis Considerations Oil’s impressive post-covid recovery has been driven by factors such as supply & demand (OPEC’s production cuts), strong global demand recovery, and of course ‘higher for longer’ inflation . The geopolitical crisis saw upside in WTI that reached levels last seen since in 2008. At these levels the risk to demand destruction and stagflation is high which means we remain cautious of oil in the med-term . Reason for that view is: Synchronised policy tightening from DM central banks targeting demand, slowing growth, consensus that is very long oil , steep backwardation curve (usually sees negative forward returns), heightened implied volatility . Even though we remain cautious on oil , the geopolitical risks remains a key focus for oil and thus for Petro-currencies like the CAD and NOK (even though the CAD-Oil correlation has been hit and miss). 3. Global Risk Outlook As a high-beta currency, the CAD usually benefits from overall positive risk sentiment as well as environments that benefit pro-cyclical assets. Thus, both short-term (immediate) and med-term (underlying) risk sentiment will always be a key consideration for the CAD. 4. CFTC Analysis Very bullish positioning signals with large specs and leveraged funds trimming shorts and asset managers adding a big 20K net-longs. It seems markets are warning to the idea of a 50bsp hike from the BoC after recent BoC comments. We continue to think recent price action is potentially setting up a similar path compared to April and Oct 2021 where markets were too aggressive and optimistic to price in upside for the CAD, only to then see majority of it unwind later. We’ll use any outsized strength for AUDCAD long opportunities. 5. The Week Ahead There are two key economic releases in focus for the CAD this week with the Business Outlook Survey coming up on Monday and the Jobs report on Friday. With recent comments from the BoC turning up the hawkish rhetoric, the data this week will be eyed to get a better sense of whether the BoC will move by 25bsp or 50bsp at their next meeting. For the Business Outlook Survey markets participants are expecting a solid price due to increased commodity prices after the war broke out. Furthermore, the markets are looking for a continuation in the job gains, even though we’ve explained before that the previous print wasn’t all that it was made out to be with net-job gains not as spectacular as some made it out to be. After Friday’s solid US NFP, and after the recent BoC comments the jobs print and the Business Outlook Survey could be enough to push STIR markets over the edge and start pricing in a 50bsp. Even though that can certainly be positive for currency, we don’t have appetite to chase the CAD higher as it’s seen a lot of one-sided upsides which does make it vulnerable to correction. Our preferred longs are AUDCAD and USDCAD but waiting for a catalyst to trade looks like the best course of action right now.
by thunderpips
2
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 The USD’s med-term bias remains bullish but positioning for large specs and asset managers are close to multiyear highs. That always increases risks of short-term corrections against the underlying trend. As the med-term bias is still bullish we don’t want to necessarily sell the USD into a slowing growth environment (see notes above), so we could rather opt to buy it versus weaker currencies which also seems stretched long (CAD comes to mind). 4. The Week Ahead The USD had a solid week, trimming prior losses and getting close to the top of recent highs. The upside made sense from a technical perspective, after bouncing from key support around 97.70, but we do think there was more behind the upside. As the USD is usually inversely correlated to the growth outlook, the slowing in a few key economic data points didn’t bode well for the growth outlook. Despite another solid jobs report, other growth metrics slowed ( Personal Income , Personal Consumption, ISM Mfg PMI) which adds to other data which has also been slowing down (Retail Sales, Industrial Production, Consumer Sentiment and Confidence). All of this doesn’t mean a recession is imminent (even though the infamous 2s10s yield spread has inverted), it simply means that the expected slowdown in growth is showing up, but it’s showing a faster than expected move, which is important. After the dismal ISM Mfg PMI report (where the headline slowed more than expected while Prices Paid jolted higher – a typical stagflation print), the incoming ISM Services PMI print on Tuesday will be an important one to keep on the radar. As the Services sector makes up close to 70% of GDP, any big surprises (either good or bad) will get attention from the market. It’s important to see the USD in the right context though. Usually, bad data should be bad for the USD as it means less need for tightening policy from the Fed, but in the current context the focus is on growth, where an aggressive Fed mixed with a slowing economy usually sees a positive expected return for the global reserve currency. With that context in mind, the FOMC meeting minutes could ‘spook’ markets even further, but that seems like a stretched after so many Fed speakers voiced their opinions after the meeting. Geopolitical risks are still on the radar, and as the USD is a safe haven, any major escalations (expected to be USD positive) or de-escalations (expected to be USD negative) will also be in focus. CAD FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy The BoC did not surprise at their March meeting by hiking rates to 0.50% from 0.25% and continuing the reinvestment phase regarding asset purchases. The bank noted that the Russia/Ukraine war was a new major uncertainty for the economy and that as a result inflation is now expected to be higher in the near-term. They were optimistic about the growth outlook though and reiterated that it expects further interest rate rises will be needed. On the QT side, Gov Macklem noted that around 40% of the bank's bond holdings were due to mature within two years, and suggested that balance sheet could shrink quickly, and also added that they will discuss ending the reinvestment phase and starting QT at the April meeting. The Governor also said he didn’t rule out the potential for 50bsp rate rises as oil is putting upside pressure on CPI , noting that oil prices around $110 per barrel could add another percentage point to inflation . With markets implying close to another 8 hikes this year, we remain cautious on the currency as a slowing US and Canadian economy means the bank could struggle to maintain its current hawkish path in the weeks and months ahead. 2. Intermarket Analysis Considerations Oil’s impressive post-covid recovery has been driven by factors such as supply & demand (OPEC’s production cuts), strong global demand recovery, and of course ‘higher for longer’ inflation . The geopolitical crisis saw upside in WTI that reached levels last seen since in 2008. At these levels the risk to demand destruction and stagflation is high which means we remain cautious of oil in the med-term . Reason for that view is: Synchronised policy tightening from DM central banks targeting demand, slowing growth, consensus that is very long oil , steep backwardation curve (usually sees negative forward returns), heightened implied volatility . Even though we remain cautious on oil , the geopolitical risks remains a key focus for oil and thus for Petro-currencies like the CAD and NOK (even though the CAD-Oil correlation has been hit and miss). 3. Global Risk Outlook As a high-beta currency, the CAD usually benefits from overall positive risk sentiment as well as environments that benefit pro-cyclical assets. Thus, both short-term (immediate) and med-term (underlying) risk sentiment will always be a key consideration for the CAD. 4. CFTC Analysis Very bullish positioning signals with large specs and leveraged funds trimming shorts and asset managers adding a big 20K net-longs. It seems markets are warning to the idea of a 50bsp hike from the BoC after recent BoC comments. We continue to think recent price action is potentially setting up a similar path compared to April and Oct 2021 where markets were too aggressive and optimistic to price in upside for the CAD, only to then see majority of it unwind later. We’ll use any outsized strength for AUDCAD long opportunities. 5. The Week Ahead There are two key economic releases in focus for the CAD this week with the Business Outlook Survey coming up on Monday and the Jobs report on Friday. With recent comments from the BoC turning up the hawkish rhetoric, the data this week will be eyed to get a better sense of whether the BoC will move by 25bsp or 50bsp at their next meeting. For the Business Outlook Survey markets participants are expecting a solid price due to increased commodity prices after the war broke out. Furthermore, the markets are looking for a continuation in the job gains, even though we’ve explained before that the previous print wasn’t all that it was made out to be with net-job gains not as spectacular as some made it out to be. After Friday’s solid US NFP, and after the recent BoC comments the jobs print and the Business Outlook Survey could be enough to push STIR markets over the edge and start pricing in a 50bsp. Even though that can certainly be positive for currency, we don’t have appetite to chase the CAD higher as it’s seen a lot of one-sided upsides which does make it vulnerable to correction. Our preferred longs are AUDCAD and USDCAD but waiting for a catalyst to trade looks like the best course of action right now.
by thunderpips
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