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NZD CHF - FUNDAMENTAL DRIVERSNZD FUNDAMENTAL BIAS: BULLISH 1. The Monetary Policy outlook for the RBNZ At their Oct meeting, the RBNZ delivered on expectations to raise the OCR to 0.50%. As the hike was already fully priced, the lack of new hawkish tones we saw a textbook buy-the-rumour-sell-the-fact reaction in the NZD pushing lower. There was additional focus on the RBNZ expecting headline CPI to climb above 4 percent in the near term, but the most important part of the statement was the subsequent comment that the bank still sees CPI returning towards the 2 percent midpoint over the medium term and that ‘the current COVID-19-related restrictions have not materially changed the medium-term outlook for inflation and employment since the August Statement’. Thus, despite recent covid concerns, inflation concerns and energy concerns, that part of the statement acknowledged that nothing has changed in terms of the bank’s OCR projections released at the August meeting. Unsurprisingly, the bank also stated that their future rate path is contingent on the medium-term outlook for inflation and employment, which means keeping close tabs on incoming data and the virus situation will remain a key focus for us in the weeks and months ahead. With the bank now being the first to hike rates among the major central banks and sitting on the highest cash rate among the majors, and with an OCR projection that is still head and shoulders above the rest, the bias for the NZD remains firmly titled to the upside, and as rates keeps rising, the currency’s carry attractiveness will be a key focus point for the NZD in the months ahead. 2. Developments surrounding the global risk outlook. As a high-beta currency, the NZD benefited from the market's improving risk outlook coming out of the pandemic as participants moved out of safe-havens. As a pro-cyclical currency, the NZD enjoyed upside alongside other cyclical assets supported by reflation and post-recession recovery best. If expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the NZD in the med-term , but recent short-term jitters are a timely reminder that risk sentiment is also a very important short-term driver. 3. Economic and health developments Virus cases can still have an impact on NZD sentiment, which means the fact that NZ virus cases is at record high levels is something to pay attention to. For now, it’s had very limited impact on the NZD due to the NZ government abandoning their covid-zero strategy and since virus risks have been downplayed by the RBNZ, but further escalation leading to more lockdowns will be important to keep on the radar. 4. CFTC Analysis (CFTC data delayed with Veteran’s Day) Latest CFTC data showed a positioning change of +4955 with a net non-commercial position of +13861. The NZD reflects net-long positioning for both large speculators as well as leveraged funds but are nowhere near stress levels right now. With the NZD now sitting on the highest cash rate among the major economies and with expectations of that to continue to rise we think carry attractiveness will become a key focus point for the NZD in the months ahead and should mean a favourable upside bias for the NZD against the low yielders like JPY and CHF. In the shortterm though, risk sentiment will be important as always, and also watching for potential cross flow influences from AUDNZD movements. CHF FUNDAMENTAL BIAS: BEARISH 1. Developments surrounding the global risk outlook. As a safe-haven currency, the market's risk outlook is the primary driver for the CHF with Swiss economic data or SNB policy meetings rarely being very market moving. Although SNB intervention can have a substantial impact on CHF, its impact tends to be relatively short-lived. Additionally, the SNB are unlikely to adjust policy anytime soon, given their overall dovish disposition and preference for being behind the ECB in terms of policy decisions. The market's overall risk tone remains constructive in the med-term due to the global vaccine roll out and the massive amount of monetary policy and fiscal support from governments. The Delta variant and its impact on growth expectations is of course a sobering reminder that risks remain. Thus, there is still a degree of uncertainty and risks to the overall risk outlook remains which could prove supportive for the safe havens like the CHF should negative factors for the global economy develop. However, on balance the overall risk outlook is still positive in the med-term and barring any major meltdowns in risk assets the bias for the CHF remains bearish in the med-term. 2. Idiosyncratic drivers for the CHF Despite the overall fundamental bearish bias, the CHF continues to remain surprisingly strong in the past few weeks. This divergence from the fundamental outlook does not make much sense, but this is a friendly reminder that the CHF often has a mind of its own and can often move in opposite directions from what short-term sentiment or its fundamental outlook suggests. Recent research from the team has revealed an interesting correlation between the CHF and simultaneous price action in both Gold and the USD, but it has not been enough to explain the current divergence between the CHF and its fundamental outlook. Apart from that, SNB intervention is of course always a downside risk to keep in mind, especially with the important EURCHF exchange rate drifting into an area between 1.07 and 1.05 which have in previous years sparked additional intervention from the bank. Apart from that, ING investment bank has argued that recent CHF strength could also be due to the lower inflation in Switzerland compared to the EU which meant that the real trade-weighted CHF has been trading too cheap relative to the spot price. The bank also expanded that the ECB’s bond buying programs has meant that their balance sheet is expanding more rapidly compared to that of the SNB, which could have been reasons why the SNB did not see need for ramping up FX interventions as much as we would usually expect when EURCHF drift lower into key ‘intervention territory’. The bottom line is that there are often plenty of idiosyncratic drivers which might or might not impact the CHF and makes short-term price fluctuations a mixed bag for the most part. 3. CFTC Analysis (CFTC data delayed with Veteran’s Day) Latest CFTC data showed a positioning change of -1269 with a net non-commercial position of -20648. Positioning has again decreased for the CHF with the latest CFTC data. Even though we expect the currency to continue weakening in the med-term, any drastic escalation in risk off tones could continue to provide support for the safe-haven currency in the short-term. With the EURCHF pair treading water between 1.07-1.05 the chance of intervention is rising, and at the current price levels the EURCHF does look attractive for some mean reversion value longs. But, if you choose to trade the CHF, be ready for some unexpected price action from time to time.
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3
NZD JPY - FUNDAMENTAL DRIVERSNZD FUNDAMENTAL BIAS: BULLISH 1. The Monetary Policy outlook for the RBNZ At their Oct meeting, the RBNZ delivered on expectations to raise the OCR to 0.50%. As the hike was already fully priced, the lack of new hawkish tones we saw a textbook buy-the-rumour-sell-the-fact reaction in the NZD pushing lower. There was additional focus on the RBNZ expecting headline CPI to climb above 4 percent in the near term, but the most important part of the statement was the subsequent comment that the bank still sees CPI returning towards the 2 percent midpoint over the medium term and that ‘the current COVID-19-related restrictions have not materially changed the medium-term outlook for inflation and employment since the August Statement’. Thus, despite recent covid concerns, inflation concerns and energy concerns, that part of the statement acknowledged that nothing has changed in terms of the bank’s OCR projections released at the August meeting. Unsurprisingly, the bank also stated that their future rate path is contingent on the medium-term outlook for inflation and employment, which means keeping close tabs on incoming data and the virus situation will remain a key focus for us in the weeks and months ahead. With the bank now being the first to hike rates among the major central banks and sitting on the highest cash rate among the majors, and with an OCR projection that is still head and shoulders above the rest, the bias for the NZD remains firmly titled to the upside, and as rates keeps rising, the currency’s carry attractiveness will be a key focus point for the NZD in the months ahead. 2. Developments surrounding the global risk outlook. As a high-beta currency, the NZD benefited from the market's improving risk outlook coming out of the pandemic as participants moved out of safe-havens. As a pro-cyclical currency, the NZD enjoyed upside alongside other cyclical assets supported by reflation and post-recession recovery best. If expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the NZD in the med-term , but recent short-term jitters are a timely reminder that risk sentiment is also a very important short-term driver. 3. Economic and health developments Virus cases can still have an impact on NZD sentiment, which means the fact that NZ virus cases is at record high levels is something to pay attention to. For now, it’s had very limited impact on the NZD due to the NZ government abandoning their covid-zero strategy and since virus risks have been downplayed by the RBNZ, but further escalation leading to more lockdowns will be important to keep on the radar. 4. CFTC Analysis (CFTC data delayed with Veteran’s Day) Latest CFTC data showed a positioning change of +4955 with a net non-commercial position of +13861. The NZD reflects net-long positioning for both large speculators as well as leveraged funds but are nowhere near stress levels right now. With the NZD now sitting on the highest cash rate among the major economies and with expectations of that to continue to rise we think carry attractiveness will become a key focus point for the NZD in the months ahead and should mean a favourable upside bias for the NZD against the low yielders like JPY and CHF. In the shortterm though, risk sentiment will be important as always, and also watching for potential cross flow influences from AUDNZD movements. JPY FUNDAMENTAL BIAS: BEARISH 1. Safe-haven status and overall risk outlook As a safe-haven currency, the market's risk outlook is the primary driver of JPY. Economic data rarely proves market moving; and although monetary policy expectations can prove highly market-moving in the short-term, safe-haven flows are typically the more dominant factor. The market's overall risk tone has improved considerably following the pandemic with good news about successful vaccinations, and ongoing monetary and fiscal policy support paved the way for markets to expect a robust global economic recovery. Of course, there remains many uncertainties and many countries are continuing to fight virus waves, but as a whole the outlook has kept on improving over the past couple of months, which would expect safe-haven demand to diminish and result in a bearish outlook for the JPY. 2. Low-yielding currency with inverse correlation to US10Y As a low yielding currency, the JPY usually shares an inverse correlation to strong moves in yield differentials, more specifically in strong moves in US10Y. However, like most correlations, the strength of the inverse correlation between the JPY and US10Y is not perfect and will ebb and flow depending on the type of market environment from a risk and cycle point of view. With bond yields looking a bit stretched at the current levels any decent mean reversion is expected to be supportive for the JPY, so it remains a key asset class to keep track. 3. CFTC Analysis (CFTC data delayed with Veteran’s Day) Latest CFTC data showed a positioning change of -588 with a net non-commercial position of -107624. The past few weeks of price action in the JPY was mostly driven by the excessive moves we saw in yields on the US side but was also exacerbated by risk on flows and rising oil prices which is a negative driver for Japan for its terms of trade. Even though the bias for the JPY remains firmly tilted to the downside, the moves across JPY pairs is arguably still looking stretched, and with both large speculators and leveraged funds firmly in net-short territory the odds of some mean reversion has increased. We would prefer waiting for some of the froth to mean revert before looking for new JPY shorts. As always, any major risk off flows can still support the JPY, especially with quite a sizable net-short position still built up in the currency for large speculators as well as leveraged funds, but rates have been the key driver in the short-term. The recent violent repricing in bond markets saw a huge push lower in yields that has supported the JPY, if that continues and we also see some risk off tones keep the stretched positioning in mind as it could see a big unwind if conditions align correctly.
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NZD USD - FUNDAMENTAL DRIVERSNZD FUNDAMENTAL BIAS: BULLISH 1. The Monetary Policy outlook for the RBNZ At their Oct meeting, the RBNZ delivered on expectations to raise the OCR to 0.50%. As the hike was already fully priced, the lack of new hawkish tones we saw a textbook buy-the-rumour-sell-the-fact reaction in the NZD pushing lower. There was additional focus on the RBNZ expecting headline CPI to climb above 4 percent in the near term, but the most important part of the statement was the subsequent comment that the bank still sees CPI returning towards the 2 percent midpoint over the medium term and that ‘the current COVID-19-related restrictions have not materially changed the medium-term outlook for inflation and employment since the August Statement’. Thus, despite recent covid concerns, inflation concerns and energy concerns, that part of the statement acknowledged that nothing has changed in terms of the bank’s OCR projections released at the August meeting. Unsurprisingly, the bank also stated that their future rate path is contingent on the medium-term outlook for inflation and employment, which means keeping close tabs on incoming data and the virus situation will remain a key focus for us in the weeks and months ahead. With the bank now being the first to hike rates among the major central banks and sitting on the highest cash rate among the majors, and with an OCR projection that is still head and shoulders above the rest, the bias for the NZD remains firmly titled to the upside, and as rates keeps rising, the currency’s carry attractiveness will be a key focus point for the NZD in the months ahead. 2. Developments surrounding the global risk outlook. As a high-beta currency, the NZD benefited from the market's improving risk outlook coming out of the pandemic as participants moved out of safe-havens. As a pro-cyclical currency, the NZD enjoyed upside alongside other cyclical assets supported by reflation and post-recession recovery best. If expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the NZD in the med-term, but recent short-term jitters are a timely reminder that risk sentiment is also a very important short-term driver. 3. Economic and health developments Virus cases can still have an impact on NZD sentiment, which means the fact that NZ virus cases is at record high levels is something to pay attention to. For now, it’s had very limited impact on the NZD due to the NZ government abandoning their covid-zero strategy and since virus risks have been downplayed by the RBNZ, but further escalation leading to more lockdowns will be important to keep on the radar. 4. CFTC Analysis (CFTC data delayed with Veteran’s Day) Latest CFTC data showed a positioning change of +4955 with a net non-commercial position of +13861. The NZD reflects net-long positioning for both large speculators as well as leveraged funds but are nowhere near stress levels right now. With the NZD now sitting on the highest cash rate among the major economies and with expectations of that to continue to rise we think carry attractiveness will become a key focus point for the NZD in the months ahead and should mean a favourable upside bias for the NZD against the low yielders like JPY and CHF. In the shortterm though, risk sentiment will be important as always, and also watching for potential cross flow influences from AUDNZD movements. USD FUNDAMENTAL BIAS: WEAK BULLISH 1. The Monetary Policy outlook for the FED Another bank that was hawkish in deed by dovish in word in their Nov policy decision. The Fed official announced tapering as expected, with purchases said to be reduced this month at a pace of $10bln in Treasuries and $5bln in MBS per month and explained that a mid-2022 conclusion is still their base case. There were also some hawkish language changes about inflation, with the bank dropping previous comments that called inflation transitory and replacing it with ‘expected to be transitory’, basically leaving some optionality to pivot more aggressively with tapering should price pressures stay sticky for too long. However, Fed Chair Powell did a really good job to put on a familiar dovish front by explaining that they see the current price pressures as driven by supply bottlenecks and still see those pressures cooling down in in 1H22, essentially giving themselves half a year of ‘tolerating’ the current inflation overshoot. Apart from that, Chair Powell explained that they would need to see maximum employment before their conditions for a lift off in rates would be met, and also explained that it’s likely that full employment could be reached by mid-2022. That endorsed the idea that a 2h22 hike is possible, but the Chair refused to provide any idea of what maximum employment would look like. On the rate front, Powell also explained that they think they can be patient with rates right now as they want more time to see in what shape the economy is in after the current covid shocks have calmed and after bottlenecks have eased. Overall, a policy meeting that was hawkish in their actions but dovish in their words. 2. Real Yields With a Q4 taper start and mid-2022 taper conclusion on the cards, further material downside in real yields looks like a struggle, and upside from here should support the Dollar. However, we are growing cautious of nominal yields right now, with possible downside risks brewing it means real yields could continue to drift lower, which have not yet hurt the greenback, but is something to keep on the radar. 3. The global risk outlook One supporting factor for the USD from June was the onset of downside surprises in global growth. However, there has been a growing chorus of market participants looking for a possible bounce in growth data in Q4 after the covid and supply chain related slowdown in Q3. If we do indeed see a pickup in growth, while inflation is still elevated, that would mean a reflationary environment, which is usually a negative input for the Dollar, so we want to keep that in mind when assessing the incoming US economic data in the next few weeks. 4. Economic Data Fed speak will be in focus in the week ahead, after the surprise CPI beat last week. Furthermore, markets will be looking at US Retail Sales to gauge how the consumer has been holding up after rising price pressures and after consumer sentiment took a knock in last week’s data. 5. CFTC Analysis (CFTC data delayed with Veteran’s Day) Latest CFTC data showed a positioning change of +525 with a net non-commercial position of +34982. Positioning isn’t anywhere near stress levels for the USD, but the speed of the build-up in large specular positioning has been sizeable in a short space of time. Thus, even though the med-term bias remains unchanged, it does mean the USD could be sensitive to mean reversion risks, especially trading at YTD highs.
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2
NZD USD - FUNDAMENTAL DRIVERSNZD FUNDAMENTAL BIAS: BULLISH 1. The Monetary Policy outlook for the RBNZ At their Oct meeting, the RBNZ delivered on expectations to raise the OCR to 0.50%. As the hike was already fully priced, the lack of new hawkish tones we saw a textbook buy-the-rumour-sell-the-fact reaction in the NZD pushing lower. There was additional focus on the RBNZ expecting headline CPI to climb above 4 percent in the near term, but the most important part of the statement was the subsequent comment that the bank still sees CPI returning towards the 2 percent midpoint over the medium term and that ‘the current COVID-19-related restrictions have not materially changed the medium-term outlook for inflation and employment since the August Statement’. Thus, despite recent covid concerns, inflation concerns and energy concerns, that part of the statement acknowledged that nothing has changed in terms of the bank’s OCR projections released at the August meeting. Unsurprisingly, the bank also stated that their future rate path is contingent on the medium-term outlook for inflation and employment, which means keeping close tabs on incoming data and the virus situation will remain a key focus for us in the weeks and months ahead. With the bank now being the first to hike rates among the major central banks and sitting on the highest cash rate among the majors, and with an OCR projection that is still head and shoulders above the rest, the bias for the NZD remains firmly titled to the upside, and as rates keeps rising, the currency’s carry attractiveness will be a key focus point for the NZD in the months ahead. 2. Developments surrounding the global risk outlook. As a high-beta currency, the NZD benefited from the market's improving risk outlook coming out of the pandemic as participants moved out of safe-havens. As a pro-cyclical currency, the NZD enjoyed upside alongside other cyclical assets supported by reflation and post-recession recovery best. If expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the NZD in the med-term , but recent short-term jitters are a timely reminder that risk sentiment is also a very important short-term driver. 3. Economic and health developments Virus cases can still have an impact on NZD sentiment, which means the fact that NZ virus cases is at record high levels is something to pay attention to. For now, it’s had very limited impact on the NZD due to the NZ government abandoning their covid-zero strategy and since virus risks have been downplayed by the RBNZ, but further escalation leading to more lockdowns will be important to keep on the radar. 4. CFTC Analysis Latest CFTC data showed a positioning change of +4955 with a net non-commercial position of +13861. The NZD reflects net-long positioning for both large speculators as well as leveraged funds but are nowhere near stress levels right now. With the NZD now sitting on the highest cash rate among the major economies and with expectations of that to continue to rise we think carry attractiveness will become a key focus point for the NZD in the months ahead and should mean a favourable upside bias for the NZD against the low yielders like JPY and CHF. In the shortterm though, as we mentioned above, the virus situation could see some of the recent upside given back, and also keep overall risk sentiment in mind which saw the NZD failing to benefit from the stellar quarterly jobs data released last week USD FUNDAMENTAL BIAS: WEAK BULLISH 1. The Monetary Policy outlook for the FED Another bank that was hawkish in deed by dovish in word in their Nov policy decision. The Fed official announced tapering as expected, with purchases said to be reduced this month at a pace of $10bln in Treasuries and $5bln in MBS per month and explained that a mid-2022 conclusion is still their base case. There were also some hawkish language changes about inflation , with the bank dropping previous comments that called inflation transitory and replacing it with ‘expected to be transitory’, basically leaving some optionality to pivot more aggressively with tapering should price pressures stay sticky for too long. However, Fed Chair Powell did a really good job to put on a familiar dovish front by explaining that they see the current price pressures as driven by supply bottlenecks and still see those pressures cooling down in in 1H22, essentially giving themselves half a year of ‘tolerating’ the current inflation overshoot. Apart from that, Chair Powell explained that they would need to see maximum employment before their conditions for a lift off in rates would be met, and also explained that its likely that full employment could be reached by mid-2022. That endorsed the idea that a 2h22 hike is possible, but the Chair refused to provide any idea of what maximum employment would look like. On the rate front, Powell also explained that they think they can be patient with rates right now as they want more time to see in what shape the economy is in after the current covid shocks have calmed and after bottlenecks have eased. Overall, a policy meeting that was hawkish in their actions but dovish in their words. 2. Real Yields With a Q4 taper start and mid-2022 taper conclusion on the card, we think further downside in real yields will be a struggle and the probability are skewed higher given the outlook for growth, inflation and policy, and higher real yields should be supportive for the USD in the med-term . 3. The global risk outlook One supporting factor for the USD from June was the onset of downside surprises in global growth. However, there has been a growing chorus of market participants looking for a possible bounce in growth data in Q4 after the covid and supply chain related slowdown in Q3. If we do indeed see a pickup in growth, while inflation is still elevated, that would mean a reflationary environment, which is usually a negative input for the Dollar, so we want to keep that in mind when assessing the incoming US economic data in the next few weeks. 4. Economic Data With the FOMC in the mix, the other economic data points largely took a back seat this past week, with even NFP not really creating a lot of meaningful or sustainable volatility . We did however see a late session sell-off in the Dollar, which was arguably more driven by technical factors as the Dollar topped out at key technical resistance and could also have been some profit taking after the recent push higher. This upcoming week’s main economic event will be Oct CPI and will be an event worth keeping on the radar after this past week’s FOMC. 5. CFTC Analysis Latest CFTC data showed a positioning change of +525 with a net non-commercial position of +34982. Positioning isn’t anywhere near stress levels for the USD, but the speed of the build-up in large specular positioning has been sizeable on a 1-year look back period. Thus, even though the med-term bias remains unchanged, it does mean the USD could be sensitive to mean reversion risks just like we saw on Friday while we are still trading close to YTD highs.
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2
GBP USD - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL BIAS: WEAK BULLISH 1. The Monetary Policy outlook for the BOE The BoE took a hit to their credibility with their November policy decision when the bank voted 7-2 to keep rates on hold and also had a very clear U-turn among some of the recent hawkish comments from the likes of Bailey and Pill. Going into the meeting markets had fully priced a 15bsp hike in 4Q21, and even though analysts and economists were divided on whether that hike would take place in Nov or Dec the bank’s statement and press conference has now seen market expectations for a hike pushed back to Feb 2022. This came from the bank’s dovish tilt regarding growth, inflation as well as a change or tone which said that hikes would be appropriate in the coming months if the labour data comes in inline with the bank’s projections. We were anticipating a violent repricing on med-term rate expectations for the past few weeks now, stressing that rates markets were too aggressively priced, but the U-turn from the bank regarding the near-term was surprising and means incoming labour market data will be key in gauging when lift off will occur. When asked about their obvious U-turn, the bank pushed back and said they won’t endorse market rate pricing, but external member Saunders did just that in early Oct. Overall, the bank delivered a dovish tone, and took a big hit to their credibility, which means markets will be a lot more careful with jumping the gun on their forward guidance going forward. A key reason why we have not changed our outlook for the GBP to bearish after the Nov BoE meeting is because the forecasts for both growth and inflation were conditioned on an implied bank rate of 1% by end 2022, which seems highly unlikely. Thus, after this week’s repricing, if rates price in less than 1% by 2022 then the conditioned path for growth & inflation should be higher again all else being equal. 2. The country’s economic developments The successful vaccination program and subsequent reopening of the UK economy was a big positive for Sterling from the start of the year, but with a lot of those positives already in the price and some expectation of stalling growth, the upward momentum will get tougher in the nearterm. Also, alongside the BoE’s dovish tilt incoming economic data will be crucially important for markets to gauge the rate path. 3. Political Developments Even though a Brexit deal was reached last year, some issues like the Northern Ireland protocol remains, and with neither side willing to budge it seems like these issues are here to stay for now. There has been heated rhetoric from both sides with the UK threatening to trigger Article 16 and the EU threatening to terminate the Brexit deal if they do. For now, these are just threats, but any actual escalation could increase the odds of seeing so risk premium built into Sterling. Also keep the fishing challenges with France in mind as well. 4. CFTC Analysis Latest CFTC data showed a positioning change of +94 with a net non-commercial position of +15047. Keep in mind the CFTC data released on Friday was only updated with positioning data until Tuesday 3 Nov, which means the big flush lower in Sterling after the BoE meeting will only be reflected in next week’s data. Thus, we would anticipate seeing a sizeable increase in net-short positioning following the Pound’s reaction after the meeting. With the week light on the calendar front, markets will turn attention to incoming comments from Governor Bailey (sigh). Apart from that we’ll be keeping a close eye on key technical levels to determine whether downside momentum could be stalling out. USD FUNDAMENTAL BIAS: WEAK BULLISH 1. The Monetary Policy outlook for the FED Another bank that was hawkish in deed by dovish in word in their Nov policy decision. The Fed official announced tapering as expected, with purchases said to be reduced this month at a pace of $10bln in Treasuries and $5bln in MBS per month and explained that a mid-2022 conclusion is still their base case. There were also some hawkish language changes about inflation , with the bank dropping previous comments that called inflation transitory and replacing it with ‘expected to be transitory’, basically leaving some optionality to pivot more aggressively with tapering should price pressures stay sticky for too long. However, Fed Chair Powell did a really good job to put on a familiar dovish front by explaining that they see the current price pressures as driven by supply bottlenecks and still see those pressures cooling down in in 1H22, essentially giving themselves half a year of ‘tolerating’ the current inflation overshoot. Apart from that, Chair Powell explained that they would need to see maximum employment before their conditions for a lift off in rates would be met, and also explained that its likely that full employment could be reached by mid-2022. That endorsed the idea that a 2h22 hike is possible, but the Chair refused to provide any idea of what maximum employment would look like. On the rate front, Powell also explained that they think they can be patient with rates right now as they want more time to see in what shape the economy is in after the current covid shocks have calmed and after bottlenecks have eased. Overall, a policy meeting that was hawkish in their actions but dovish in their words. 2. Real Yields With a Q4 taper start and mid-2022 taper conclusion on the card, we think further downside in real yields will be a struggle and the probability are skewed higher given the outlook for growth, inflation and policy, and higher real yields should be supportive for the USD in the med-term . 3. The global risk outlook One supporting factor for the USD from June was the onset of downside surprises in global growth. However, there has been a growing chorus of market participants looking for a possible bounce in growth data in Q4 after the covid and supply chain related slowdown in Q3. If we do indeed see a pickup in growth, while inflation is still elevated, that would mean a reflationary environment, which is usually a negative input for the Dollar, so we want to keep that in mind when assessing the incoming US economic data in the next few weeks. 4. Economic Data With the FOMC in the mix, the other economic data points largely took a back seat this past week, with even NFP not really creating a lot of meaningful or sustainable volatility . We did however see a late session sell-off in the Dollar, which was arguably more driven by technical factors as the Dollar topped out at key technical resistance and could also have been some profit taking after the recent push higher. This upcoming week’s main economic event will be Oct CPI and will be an event worth keeping on the radar after this past week’s FOMC. 5. CFTC Analysis Latest CFTC data showed a positioning change of +525 with a net non-commercial position of +34982. Positioning isn’t anywhere near stress levels for the USD, but the speed of the build-up in large specular positioning has been sizeable on a 1-year look back period. Thus, even though the med-term bias remains unchanged, it does mean the USD could be sensitive to mean reversion risks just like we saw on Friday while we are still trading close to YTD highs.
by thunderpips
1
NZD USD - FUNDAMENTAL DRIVERSNZD FUNDAMENTAL BIAS: BULLISH 1. The Monetary Policy outlook for the RBNZ At their Oct meeting, the RBNZ delivered on expectations to raise the OCR to 0.50%. As the hike was already fully priced, the lack of new hawkish tones we saw a textbook buy-the-rumour-sell-the-fact reaction in the NZD pushing lower. There was additional focus on the RBNZ expecting headline CPI to climb above 4 percent in the near term, but the most important part of the statement was the subsequent comment that the bank still sees CPI returning towards the 2 percent midpoint over the medium term and that ‘the current COVID-19-related restrictions have not materially changed the medium-term outlook for inflation and employment since the August Statement’. Thus, despite recent covid concerns, inflation concerns and energy concerns, that part of the statement acknowledged that nothing has changed in terms of the bank’s OCR projections released at the August meeting. Unsurprisingly, the bank also stated that their future rate path is contingent on the medium-term outlook for inflation and employment, which means keeping close tabs on incoming data and the virus situation will remain a key focus for us in the weeks and months ahead. With the bank now being the first to hike rates among the major central banks and sitting on the highest cash rate among the majors, and with an OCR projection that is still head and shoulders above the rest, the bias for the NZD remains firmly titled to the upside, and as rates keeps rising, the currency’s carry attractiveness will be a key focus point for the NZD in the months ahead. 2. Developments surrounding the global risk outlook. As a high-beta currency, the NZD benefited from the market's improving risk outlook coming out of the pandemic as participants moved out of safe-havens. As a pro-cyclical currency, the NZD enjoyed upside alongside other cyclical assets supported by reflation and post-recession recovery best. If expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the NZD in the med-term , but recent short-term jitters are a timely reminder that risk sentiment is also a very important short-term driver. 3. Economic and health developments Virus cases can still have an impact on NZD sentiment, which means the fact that NZ virus cases is at record high levels is something to pay attention to. For now, it’s had very limited impact on the NZD due to the NZ government abandoning their covid-zero strategy and since virus risks have been downplayed by the RBNZ, but further escalation leading to more lockdowns will be important to keep on the radar. 4. CFTC Analysis Latest CFTC data showed a positioning change of +4955 with a net non-commercial position of +13861. The NZD reflects net-long positioning for both large speculators as well as leveraged funds but are nowhere near stress levels right now. With the NZD now sitting on the highest cash rate among the major economies and with expectations of that to continue to rise we think carry attractiveness will become a key focus point for the NZD in the months ahead and should mean a favourable upside bias for the NZD against the low yielders like JPY and CHF. In the shortterm though, as we mentioned above, the virus situation could see some of the recent upside given back, and also keep overall risk sentiment in mind which saw the NZD failing to benefit from the stellar quarterly jobs data released last week USD FUNDAMENTAL BIAS: WEAK BULLISH 1. The Monetary Policy outlook for the FED Another bank that was hawkish in deed by dovish in word in their Nov policy decision. The Fed official announced tapering as expected, with purchases said to be reduced this month at a pace of $10bln in Treasuries and $5bln in MBS per month and explained that a mid-2022 conclusion is still their base case. There were also some hawkish language changes about inflation , with the bank dropping previous comments that called inflation transitory and replacing it with ‘expected to be transitory’, basically leaving some optionality to pivot more aggressively with tapering should price pressures stay sticky for too long. However, Fed Chair Powell did a really good job to put on a familiar dovish front by explaining that they see the current price pressures as driven by supply bottlenecks and still see those pressures cooling down in in 1H22, essentially giving themselves half a year of ‘tolerating’ the current inflation overshoot. Apart from that, Chair Powell explained that they would need to see maximum employment before their conditions for a lift off in rates would be met, and also explained that its likely that full employment could be reached by mid-2022. That endorsed the idea that a 2h22 hike is possible, but the Chair refused to provide any idea of what maximum employment would look like. On the rate front, Powell also explained that they think they can be patient with rates right now as they want more time to see in what shape the economy is in after the current covid shocks have calmed and after bottlenecks have eased. Overall, a policy meeting that was hawkish in their actions but dovish in their words. 2. Real Yields With a Q4 taper start and mid-2022 taper conclusion on the card, we think further downside in real yields will be a struggle and the probability are skewed higher given the outlook for growth, inflation and policy, and higher real yields should be supportive for the USD in the med-term . 3. The global risk outlook One supporting factor for the USD from June was the onset of downside surprises in global growth. However, there has been a growing chorus of market participants looking for a possible bounce in growth data in Q4 after the covid and supply chain related slowdown in Q3. If we do indeed see a pickup in growth, while inflation is still elevated, that would mean a reflationary environment, which is usually a negative input for the Dollar, so we want to keep that in mind when assessing the incoming US economic data in the next few weeks. 4. Economic Data With the FOMC in the mix, the other economic data points largely took a back seat this past week, with even NFP not really creating a lot of meaningful or sustainable volatility . We did however see a late session sell-off in the Dollar, which was arguably more driven by technical factors as the Dollar topped out at key technical resistance and could also have been some profit taking after the recent push higher. This upcoming week’s main economic event will be Oct CPI and will be an event worth keeping on the radar after this past week’s FOMC. 5. CFTC Analysis Latest CFTC data showed a positioning change of +525 with a net non-commercial position of +34982. Positioning isn’t anywhere near stress levels for the USD, but the speed of the build-up in large specular positioning has been sizeable on a 1-year look back period. Thus, even though the med-term bias remains unchanged, it does mean the USD could be sensitive to mean reversion risks just like we saw on Friday while we are still trading close to YTD highs.
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4
CAD CHF - FUNDAMENTAL DRIVERSCAD FUNDAMENTAL BIAS: BULLISH 1. The Monetary Policy outlook for the BoC At their Oct meeting the BoC surprised to put an early end to QE purchases and updated forward guidance to suggest an earlier lift off in rates by explaining that project economic slack to be absorbed by the middle quarters of 2022. The initial reaction was bullish as one would expect but the biggest risk to further upside for the CAD from here is the fact that a lot of these positives that was confirmed by the BoC has already been reflected in both the CAD and rates markets over the past few weeks. The CAD has seen a similar run to the upside back in 1Q21 with the BoC’s hawkish tilt, and similarly to that we feel current prices for rates and the CAD already reflect a great deal of the positives. Thus, even though the med-term outlook remains tilted to the upside for the CAD, there is the risk of seeing some unwind of the recent upside and is something to be mindful of when making any med-term allocations to the upside in the CAD. 2. Commodity-linked currency with dependency on Oil exports Oil massive post-covid recovery continues on the back of three drivers: supply & demand (OPEC’s production cuts); improving global economic outlook and improving oil demand outlook, even though slightly pushed back by Delta concerns; rising inflation expectations. Even though further gains for Oil will arguably prove to be an uphill battle, the bias remains higher in the med-term as long as current supportive factors and drivers remains intact. There will of course be short-term ebbs and flows which could affect the CAD from an intermarket point of view, but as long as the med-term view for Oil remains higher it should be supportive for Petro-currencies like the CAD. OPEC seems content to stick to their plan to bring oil supply back gradually, by this past week deciding to bring the expected 400K barrels of supply online from next month. The one risk factor to watch for Oil is the pressure being placed on OPEC from the US administration to pump more oil in order to cool rising oil prices. Until now, OPEC have not been moved to cave to the US pressure, but there is the risk that Saudi Arabia buckles under the pressure and opts to push for higher production in the months ahead. Similarly, we also need to keep an eye on the US in the case they release some of their strategic reserves which should be a short-term headwind for Oil . 3. Developments surrounding the global risk outlook. As a high-beta currency, the CAD benefited from the market's improving risk outlook coming out of the pandemic as participants moved out of safe-havens. As a pro-cyclical currency, the CAD enjoyed upside alongside other cyclical assets supported by reflation and post-recession recovery best. If expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the CAD in the med-term , but recent short-term jitters are a timely reminder that risk sentiment is also a very important short-term driver. 4. CFTC Analysis Latest CFTC data showed a positioning change of +842 with a net non-commercial position of +4162. With a lot of positives in the price for the CAD and the front-end yields, it is encouraging to see that positioning isn’t stretched large specs or leveraged funds. That suggests that further upside could be possible if short-term sentiment for oil and risk assets remain favourable. However, since prices do look stretched, and since JPY positioning is very net-short, any sudden risk off bouts could see some decent mean reversion opportunities in CADJPY to the downside, especially if oil prices also come under pressure as falling oil prices will be a double positive for the JPY. CHF FUNDAMENTAL BIAS: BEARISH 1. Developments surrounding the global risk outlook. As a safe-haven currency, the market's risk outlook is the primary driver for the CHF with Swiss economic data or SNB policy meetings rarely being very market moving. Although SNB intervention can have a substantial impact on CHF, its impact tends to be relatively short-lived. Additionally, the SNB are unlikely to adjust policy anytime soon, given their overall dovish disposition and preference for being behind the ECB in terms of policy decisions. The market's overall risk tone remains constructive in the med-term due to the global vaccine roll out and the massive amount of monetary policy and fiscal support from governments. The Delta variant and its impact on growth expectations is of course a sobering reminder that risks remain. Thus, there is still a degree of uncertainty and risks to the overall risk outlook remains which could prove supportive for the safe havens like the CHF should negative factors for the global economy develop. However, on balance the overall risk outlook is still positive in the med-term and barring any major meltdowns in risk assets the bias for the CHF remains bearish in the med-term . 2. Idiosyncratic drivers for the CHF Despite the overall fundamental bearish bias, the CHF continues to remain surprisingly strong in the past few weeks. This divergence from the fundamental outlook does not make much sense, but this is a friendly reminder that the CHF often has a mind of its own and can often move in opposite directions from what short-term sentiment or its fundamental outlook suggests. Recent research from the team has revealed an interesting correlation between the CHF and simultaneous price action in both Gold and the USD, but it has not been enough to explain the current divergence between the CHF and its fundamental outlook. Apart from that, SNB intervention is of course always a downside risk to keep in mind, especially with the important EURCHF exchange rate drifting into an area between 1.07 and 1. 05 which have in previous years sparked additional intervention from the bank. Apart from that, ING investment bank has argued that recent CHF strength could also be due to the lower inflation in Switzerland compared to the EU which meant that the real trade-weighted CHF has been trading too cheap relative to the spot price. The bank also expanded that the ECB’s bond buying programs has meant that their balance sheet is expanding more rapidly compared to that of the SNB, which could have been reasons why the SNB did not see need for ramping up FX interventions as much as we would usually expect when EURCHF drift lower into key ‘intervention territory’. The bottom line is that there are often plenty of idiosyncratic drivers which might or might not impact the CHF and makes short-term price fluctuations a mixed bag for the most part. 3. CFTC Analysis Latest CFTC data showed a positioning change of -1269 with a net non-commercial position of -20648. Positioning has again decreased for the CHF with the latest CFTC data. Even though we expect the currency to continue weakening in the med-term , any drastic escalation in risk off tones could continue to provide support for the safe-haven currency in the short-term. With the EURCHF pair treading water between 1.07-1. 05 the chance of intervention is rising, and at the current price levels the EURCHF does look attractive for some mean reversion value longs. But, if you choose to trade the CHF, be ready for some unexpected price action from time to time.
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1
CAD JPY - FUNDAMENTAL DRIVERSCAD FUNDAMENTAL BIAS: BULLISH 1. The Monetary Policy outlook for the BoC At their Oct meeting the BoC surprised to put an early end to QE purchases and updated forward guidance to suggest an earlier lift off in rates by explaining that project economic slack to be absorbed by the middle quarters of 2022. The initial reaction was bullish as one would expect but the biggest risk to further upside for the CAD from here is the fact that a lot of these positives that was confirmed by the BoC has already been reflected in both the CAD and rates markets over the past few weeks. The CAD has seen a similar run to the upside back in 1Q21 with the BoC’s hawkish tilt, and similarly to that we feel current prices for rates and the CAD already reflect a great deal of the positives. Thus, even though the med-term outlook remains tilted to the upside for the CAD, there is the risk of seeing some unwind of the recent upside and is something to be mindful of when making any med-term allocations to the upside in the CAD. 2. Commodity-linked currency with dependency on Oil exports Oil massive post-covid recovery continues on the back of three drivers: supply & demand (OPEC’s production cuts); improving global economic outlook and improving oil demand outlook, even though slightly pushed back by Delta concerns; rising inflation expectations. Even though further gains for Oil will arguably prove to be an uphill battle, the bias remains higher in the med-term as long as current supportive factors and drivers remains intact. There will of course be short-term ebbs and flows which could affect the CAD from an intermarket point of view, but as long as the med-term view for Oil remains higher it should be supportive for Petro-currencies like the CAD. OPEC seems content to stick to their plan to bring oil supply back gradually, by this past week deciding to bring the expected 400K barrels of supply online from next month. The one risk factor to watch for Oil is the pressure being placed on OPEC from the US administration to pump more oil in order to cool rising oil prices. Until now, OPEC have not been moved to cave to the US pressure, but there is the risk that Saudi Arabia buckles under the pressure and opts to push for higher production in the months ahead. Similarly, we also need to keep an eye on the US in the case they release some of their strategic reserves which should be a short-term headwind for Oil . 3. Developments surrounding the global risk outlook. As a high-beta currency, the CAD benefited from the market's improving risk outlook coming out of the pandemic as participants moved out of safe-havens. As a pro-cyclical currency, the CAD enjoyed upside alongside other cyclical assets supported by reflation and post-recession recovery best. If expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the CAD in the med-term , but recent short-term jitters are a timely reminder that risk sentiment is also a very important short-term driver. 4. CFTC Analysis Latest CFTC data showed a positioning change of +842 with a net non-commercial position of +4162. With a lot of positives in the price for the CAD and the front-end yields, it is encouraging to see that positioning isn’t stretched large specs or leveraged funds. That suggests that further upside could be possible if short-term sentiment for oil and risk assets remain favourable. However, since prices do look stretched, and since JPY positioning is very net-short, any sudden risk off bouts could see some decent mean reversion opportunities in CADJPY to the downside, especially if oil prices also come under pressure as falling oil prices will be a double positive for the JPY. JPY FUNDAMENTAL BIAS: BEARISH 1. Safe-haven status and overall risk outlook As a safe-haven currency, the market's risk outlook is the primary driver of JPY. Economic data rarely proves market moving; and although monetary policy expectations can prove highly market-moving in the short-term, safe-haven flows are typically the more dominant factor. The market's overall risk tone has improved considerably following the pandemic with good news about successful vaccinations, and ongoing monetary and fiscal policy support paved the way for markets to expect a robust global economic recovery. Of course, there remains many uncertainties and many countries are continuing to fight virus waves, but as a whole the outlook has kept on improving over the past couple of months, which would expect safe-haven demand to diminish and result in a bearish outlook for the JPY. 2. Low-yielding currency with inverse correlation to US10Y As a low yielding currency, the JPY usually shares an inverse correlation to strong moves in yield differentials, more specifically in strong moves in US10Y . However, like most correlations, the strength of the inverse correlation between the JPY and US10Y is not perfect and will ebb and flow depending on the type of market environment from a risk and cycle point of view. With bond yields looking a bit stretched at the current levels any decent mean reversion is expected to be supportive for the JPY, so it remains a key asset class to keep track. 3. CFTC Analysis Latest CFTC data showed a positioning change of -588 with a net non-commercial position of -107624. The past few weeks of price action in the JPY was mostly driven by the excessive moves we saw in yields on the US side but was also exacerbated by risk on flows and rising oil prices which is a negative driver for Japan for its terms of trade. Even though the bias for the JPY remains firmly tilted to the downside, the moves across JPY pairs is arguably still looking stretched, and with both large speculators and leveraged funds firmly in net-short territory the odds of some mean reversion has increased. We would prefer waiting for some of the froth to mean revert before looking for new JPY shorts. As always, any major risk off flows can still support the JPY, especially with quite a sizable net-short position still built up in the currency for large speculators as well as leveraged funds, but rates have been the key driver in the short-term. The recent violent repricing in bond markets saw a huge push lower in yields that has supported the JPY, if that continues and we also see some risk off tones keep the stretched positioning in mind as it could see a big unwind if conditions align correctly.
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1
USD CAD - FUNDAMENTAL DRIVERSUSD FUNDAMENTAL BIAS: WEAK BULLISH 1. The Monetary Policy outlook for the FED Another bank that was hawkish in deed by dovish in word in their Nov policy decision. The Fed official announced tapering as expected, with purchases said to be reduced this month at a pace of $10bln in Treasuries and $5bln in MBS per month and explained that a mid-2022 conclusion is still their base case. There were also some hawkish language changes about inflation , with the bank dropping previous comments that called inflation transitory and replacing it with ‘expected to be transitory’, basically leaving some optionality to pivot more aggressively with tapering should price pressures stay sticky for too long. However, Fed Chair Powell did a really good job to put on a familiar dovish front by explaining that they see the current price pressures as driven by supply bottlenecks and still see those pressures cooling down in in 1H22, essentially giving themselves half a year of ‘tolerating’ the current inflation overshoot. Apart from that, Chair Powell explained that they would need to see maximum employment before their conditions for a lift off in rates would be met, and also explained that its likely that full employment could be reached by mid-2022. That endorsed the idea that a 2h22 hike is possible, but the Chair refused to provide any idea of what maximum employment would look like. On the rate front, Powell also explained that they think they can be patient with rates right now as they want more time to see in what shape the economy is in after the current covid shocks have calmed and after bottlenecks have eased. Overall, a policy meeting that was hawkish in their actions but dovish in their words. 2. Real Yields With a Q4 taper start and mid-2022 taper conclusion on the card, we think further downside in real yields will be a struggle and the probability are skewed higher given the outlook for growth, inflation and policy, and higher real yields should be supportive for the USD in the med-term . 3. The global risk outlook One supporting factor for the USD from June was the onset of downside surprises in global growth. However, there has been a growing chorus of market participants looking for a possible bounce in growth data in Q4 after the covid and supply chain related slowdown in Q3. If we do indeed see a pickup in growth, while inflation is still elevated, that would mean a reflationary environment, which is usually a negative input for the Dollar, so we want to keep that in mind when assessing the incoming US economic data in the next few weeks. 4. Economic Data With the FOMC in the mix, the other economic data points largely took a back seat this past week, with even NFP not really creating a lot of meaningful or sustainable volatility . We did however see a late session sell-off in the Dollar, which was arguably more driven by technical factors as the Dollar topped out at key technical resistance and could also have been some profit taking after the recent push higher. This upcoming week’s main economic event will be Oct CPI and will be an event worth keeping on the radar after this past week’s FOMC. 5. CFTC Analysis Latest CFTC data showed a positioning change of +525 with a net non-commercial position of +34982. Positioning isn’t anywhere near stress levels for the USD, but the speed of the build-up in large specular positioning has been sizeable on a 1-year look back period. Thus, even though the med-term bias remains unchanged, it does mean the USD could be sensitive to mean reversion risks just like we saw on Friday while we are still trading close to YTD highs. CAD FUNDAMENTAL BIAS: BULLISH 1. The Monetary Policy outlook for the BoC At their Oct meeting the BoC surprised to put an early end to QE purchases and updated forward guidance to suggest an earlier lift off in rates by explaining that project economic slack to be absorbed by the middle quarters of 2022. The initial reaction was bullish as one would expect but the biggest risk to further upside for the CAD from here is the fact that a lot of these positives that was confirmed by the BoC has already been reflected in both the CAD and rates markets over the past few weeks. The CAD has seen a similar run to the upside back in 1Q21 with the BoC’s hawkish tilt, and similarly to that we feel current prices for rates and the CAD already reflect a great deal of the positives. Thus, even though the med-term outlook remains tilted to the upside for the CAD, there is the risk of seeing some unwind of the recent upside and is something to be mindful of when making any med-term allocations to the upside in the CAD. 2. Commodity-linked currency with dependency on Oil exports Oil massive post-covid recovery continues on the back of three drivers: supply & demand (OPEC’s production cuts); improving global economic outlook and improving oil demand outlook, even though slightly pushed back by Delta concerns; rising inflation expectations. Even though further gains for Oil will arguably prove to be an uphill battle, the bias remains higher in the med-term as long as current supportive factors and drivers remains intact. There will of course be short-term ebbs and flows which could affect the CAD from an intermarket point of view, but as long as the med-term view for Oil remains higher it should be supportive for Petro-currencies like the CAD. OPEC seems content to stick to their plan to bring oil supply back gradually, by this past week deciding to bring the expected 400K barrels of supply online from next month. The one risk factor to watch for Oil is the pressure being placed on OPEC from the US administration to pump more oil in order to cool rising oil prices. Until now, OPEC have not been moved to cave to the US pressure, but there is the risk that Saudi Arabia buckles under the pressure and opts to push for higher production in the months ahead. Similarly, we also need to keep an eye on the US in the case they release some of their strategic reserves which should be a short-term headwind for Oil. 3. Developments surrounding the global risk outlook. As a high-beta currency, the CAD benefited from the market's improving risk outlook coming out of the pandemic as participants moved out of safe-havens. As a pro-cyclical currency, the CAD enjoyed upside alongside other cyclical assets supported by reflation and post-recession recovery best. If expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the CAD in the med-term, but recent short-term jitters are a timely reminder that risk sentiment is also a very important short-term driver. 4. CFTC Analysis Latest CFTC data showed a positioning change of +842 with a net non-commercial position of +4162. With a lot of positives in the price for the CAD and the front-end yields, it is encouraging to see that positioning isn’t stretched large specs or leveraged funds. That suggests that further upside could be possible if short-term sentiment for oil and risk assets remain favourable. However, since prices do look stretched, and since JPY positioning is very net-short, any sudden risk off bouts could see some decent mean reversion opportunities in CADJPY to the downside, especially if oil prices also come under pressure as falling oil prices will be a double positive for the JPY.
by thunderpips
2
NZD CHF - FUNDAMENTAL DRIVERSNZD FUNDAMENTAL BIAS: BULLISH 1. The Monetary Policy outlook for the RBNZ At their Oct meeting, the RBNZ delivered on expectations to raise the OCR to 0.50%. As the hike was already fully priced, the lack of new hawkish tones we saw a textbook buy-the-rumour-sell-the-fact reaction in the NZD pushing lower. There was additional focus on the RBNZ expecting headline CPI to climb above 4 percent in the near term, but the most important part of the statement was the subsequent comment that the bank still sees CPI returning towards the 2 percent midpoint over the medium term and that ‘the current COVID-19-related restrictions have not materially changed the medium-term outlook for inflation and employment since the August Statement’. Thus, despite recent covid concerns, inflation concerns and energy concerns, that part of the statement acknowledged that nothing has changed in terms of the bank’s OCR projections released at the August meeting. Unsurprisingly, the bank also stated that their future rate path is contingent on the medium-term outlook for inflation and employment, which means keeping close tabs on incoming data and the virus situation will remain a key focus for us in the weeks and months ahead. With the bank now being the first to hike rates among the major central banks and sitting on the highest cash rate among the majors, and with an OCR projection that is still head and shoulders above the rest, the bias for the NZD remains firmly titled to the upside, and as rates keeps rising, the currency’s carry attractiveness will be a key focus point for the NZD in the months ahead. 2. Developments surrounding the global risk outlook. As a high-beta currency, the NZD benefited from the market's improving risk outlook coming out of the pandemic as participants moved out of safe-havens. As a pro-cyclical currency, the NZD enjoyed upside alongside other cyclical assets supported by reflation and post-recession recovery best. If expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the NZD in the med-term , but recent short-term jitters are a timely reminder that risk sentiment is also a very important short-term driver. 3. Economic and health developments Virus cases can still have an impact on NZD sentiment, which means the fact that NZ virus cases is at record high levels is something to pay attention to. For now, it’s had very limited impact on the NZD due to the NZ government abandoning their covid-zero strategy and since virus risks have been downplayed by the RBNZ, but further escalation leading to more lockdowns will be important to keep on the radar. 4. CFTC Analysis Latest CFTC data showed a positioning change of +4955 with a net non-commercial position of +13861. The NZD reflects net-long positioning for both large speculators as well as leveraged funds but are nowhere near stress levels right now. With the NZD now sitting on the highest cash rate among the major economies and with expectations of that to continue to rise we think carry attractiveness will become a key focus point for the NZD in the months ahead and should mean a favourable upside bias for the NZD against the low yielders like JPY and CHF. In the shortterm though, as we mentioned above, the virus situation could see some of the recent upside given back, and also keep overall risk sentiment in mind which saw the NZD failing to benefit from the stellar quarterly jobs data released last week. CHF FUNDAMENTAL BIAS: BEARISH 1. Developments surrounding the global risk outlook. As a safe-haven currency, the market's risk outlook is the primary driver for the CHF with Swiss economic data or SNB policy meetings rarely being very market moving. Although SNB intervention can have a substantial impact on CHF, its impact tends to be relatively short-lived. Additionally, the SNB are unlikely to adjust policy anytime soon, given their overall dovish disposition and preference for being behind the ECB in terms of policy decisions. The market's overall risk tone remains constructive in the med-term due to the global vaccine roll out and the massive amount of monetary policy and fiscal support from governments. The Delta variant and its impact on growth expectations is of course a sobering reminder that risks remain. Thus, there is still a degree of uncertainty and risks to the overall risk outlook remains which could prove supportive for the safe havens like the CHF should negative factors for the global economy develop. However, on balance the overall risk outlook is still positive in the med-term and barring any major meltdowns in risk assets the bias for the CHF remains bearish in the med-term. 2. Idiosyncratic drivers for the CHF Despite the overall fundamental bearish bias, the CHF continues to remain surprisingly strong in the past few weeks. This divergence from the fundamental outlook does not make much sense, but this is a friendly reminder that the CHF often has a mind of its own and can often move in opposite directions from what short-term sentiment or its fundamental outlook suggests. Recent research from the team has revealed an interesting correlation between the CHF and simultaneous price action in both Gold and the USD, but it has not been enough to explain the current divergence between the CHF and its fundamental outlook. Apart from that, SNB intervention is of course always a downside risk to keep in mind, especially with the important EURCHF exchange rate drifting into an area between 1.07 and 1.05 which have in previous years sparked additional intervention from the bank. Apart from that, ING investment bank has argued that recent CHF strength could also be due to the lower inflation in Switzerland compared to the EU which meant that the real trade-weighted CHF has been trading too cheap relative to the spot price. The bank also expanded that the ECB’s bond buying programs has meant that their balance sheet is expanding more rapidly compared to that of the SNB, which could have been reasons why the SNB did not see need for ramping up FX interventions as much as we would usually expect when EURCHF drift lower into key ‘intervention territory’. The bottom line is that there are often plenty of idiosyncratic drivers which might or might not impact the CHF and makes short-term price fluctuations a mixed bag for the most part. 3. CFTC Analysis Latest CFTC data showed a positioning change of -1269 with a net non-commercial position of -20648. Positioning has again decreased for the CHF with the latest CFTC data. Even though we expect the currency to continue weakening in the med-term, any drastic escalation in risk off tones could continue to provide support for the safe-haven currency in the short-term. With the EURCHF pair treading water between 1.07-1.05 the chance of intervention is rising, and at the current price levels the EURCHF does look attractive for some mean reversion value longs. But, if you choose to trade the CHF, be ready for some unexpected price action from time to time (see driver 2 above).
by thunderpips
1
NZD JPY - FUNDAMENTAL DRIVERSNZD FUNDAMENTAL BIAS: BULLISH 1. The Monetary Policy outlook for the RBNZ At their Oct meeting, the RBNZ delivered on expectations to raise the OCR to 0.50%. As the hike was already fully priced, the lack of new hawkish tones we saw a textbook buy-the-rumour-sell-the-fact reaction in the NZD pushing lower. There was additional focus on the RBNZ expecting headline CPI to climb above 4 percent in the near term, but the most important part of the statement was the subsequent comment that the bank still sees CPI returning towards the 2 percent midpoint over the medium term and that ‘the current COVID-19-related restrictions have not materially changed the medium-term outlook for inflation and employment since the August Statement’. Thus, despite recent covid concerns, inflation concerns and energy concerns, that part of the statement acknowledged that nothing has changed in terms of the bank’s OCR projections released at the August meeting. Unsurprisingly, the bank also stated that their future rate path is contingent on the medium-term outlook for inflation and employment, which means keeping close tabs on incoming data and the virus situation will remain a key focus for us in the weeks and months ahead. With the bank now being the first to hike rates among the major central banks and sitting on the highest cash rate among the majors, and with an OCR projection that is still head and shoulders above the rest, the bias for the NZD remains firmly titled to the upside, and as rates keeps rising, the currency’s carry attractiveness will be a key focus point for the NZD in the months ahead. 2. Developments surrounding the global risk outlook. As a high-beta currency, the NZD benefited from the market's improving risk outlook coming out of the pandemic as participants moved out of safe-havens. As a pro-cyclical currency, the NZD enjoyed upside alongside other cyclical assets supported by reflation and post-recession recovery best. If expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the NZD in the med-term , but recent short-term jitters are a timely reminder that risk sentiment is also a very important short-term driver. 3. Economic and health developments Virus cases can still have an impact on NZD sentiment, which means the fact that NZ virus cases is at record high levels is something to pay attention to. For now, it’s had very limited impact on the NZD due to the NZ government abandoning their covid-zero strategy and since virus risks have been downplayed by the RBNZ, but further escalation leading to more lockdowns will be important to keep on the radar. 4. CFTC Analysis Latest CFTC data showed a positioning change of +4955 with a net non-commercial position of +13861. The NZD reflects net-long positioning for both large speculators as well as leveraged funds but are nowhere near stress levels right now. With the NZD now sitting on the highest cash rate among the major economies and with expectations of that to continue to rise we think carry attractiveness will become a key focus point for the NZD in the months ahead and should mean a favourable upside bias for the NZD against the low yielders like JPY and CHF. In the shortterm though, as we mentioned above, the virus situation could see some of the recent upside given back, and also keep overall risk sentiment in mind which saw the NZD failing to benefit from the stellar quarterly jobs data released last week. JPY FUNDAMENTAL BIAS: BEARISH 1. Safe-haven status and overall risk outlook As a safe-haven currency, the market's risk outlook is the primary driver of JPY. Economic data rarely proves market moving; and although monetary policy expectations can prove highly market-moving in the short-term, safe-haven flows are typically the more dominant factor. The market's overall risk tone has improved considerably following the pandemic with good news about successful vaccinations, and ongoing monetary and fiscal policy support paved the way for markets to expect a robust global economic recovery. Of course, there remains many uncertainties and many countries are continuing to fight virus waves, but as a whole the outlook has kept on improving over the past couple of months, which would expect safe-haven demand to diminish and result in a bearish outlook for the JPY. 2. Low-yielding currency with inverse correlation to US10Y As a low yielding currency, the JPY usually shares an inverse correlation to strong moves in yield differentials, more specifically in strong moves in US10Y. However, like most correlations, the strength of the inverse correlation between the JPY and US10Y is not perfect and will ebb and flow depending on the type of market environment from a risk and cycle point of view. With bond yields looking a bit stretched at the current levels any decent mean reversion is expected to be supportive for the JPY, so it remains a key asset class to keep track. 3. CFTC Analysis Latest CFTC data showed a positioning change of -588 with a net non-commercial position of -107624. The past few weeks of price action in the JPY was mostly driven by the excessive moves we saw in yields on the US side but was also exacerbated by risk on flows and rising oil prices which is a negative driver for Japan for its terms of trade. Even though the bias for the JPY remains firmly tilted to the downside, the moves across JPY pairs is arguably still looking stretched, and with both large speculators and leveraged funds firmly in net-short territory the odds of some mean reversion has increased. We would prefer waiting for some of the froth to mean revert before looking for new JPY shorts. As always, any major risk off flows can still support the JPY, especially with quite a sizable net-short position still built up in the currency for large speculators as well as leveraged funds, but rates have been the key driver in the short-term. The recent violent repricing in bond markets saw a huge push lower in yields that has supported the JPY, if that continues and we also see some risk off tones keep the stretched positioning in mind as it could see a big unwind if conditions align correctly.
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NZD USD - FUNDAMENTAL DRIVERSNZD FUNDAMENTAL BIAS: BULLISH 1. The Monetary Policy outlook for the RBNZ At their Oct meeting, the RBNZ delivered on expectations to raise the OCR to 0.50%. As the hike was already fully priced, the lack of new hawkish tones we saw a textbook buy-the-rumour-sell-the-fact reaction in the NZD pushing lower. There was additional focus on the RBNZ expecting headline CPI to climb above 4 percent in the near term, but the most important part of the statement was the subsequent comment that the bank still sees CPI returning towards the 2 percent midpoint over the medium term and that ‘the current COVID-19-related restrictions have not materially changed the medium-term outlook for inflation and employment since the August Statement’. Thus, despite recent covid concerns, inflation concerns and energy concerns, that part of the statement acknowledged that nothing has changed in terms of the bank’s OCR projections released at the August meeting. Unsurprisingly, the bank also stated that their future rate path is contingent on the medium-term outlook for inflation and employment, which means keeping close tabs on incoming data and the virus situation will remain a key focus for us in the weeks and months ahead. With the bank now being the first to hike rates among the major central banks and sitting on the highest cash rate among the majors, and with an OCR projection that is still head and shoulders above the rest, the bias for the NZD remains firmly titled to the upside, and as rates keeps rising, the currency’s carry attractiveness will be a key focus point for the NZD in the months ahead. 2. Developments surrounding the global risk outlook. As a high-beta currency, the NZD benefited from the market's improving risk outlook coming out of the pandemic as participants moved out of safe-havens. As a pro-cyclical currency, the NZD enjoyed upside alongside other cyclical assets supported by reflation and post-recession recovery best. If expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the NZD in the med-term, but recent short-term jitters are a timely reminder that risk sentiment is also a very important short-term driver. 3. Economic and health developments Virus cases can still have an impact on NZD sentiment, which means the fact that NZ virus cases is at record high levels is something to pay attention to. For now, it’s had very limited impact on the NZD due to the NZ government abandoning their covid-zero strategy and since virus risks have been downplayed by the RBNZ, but further escalation leading to more lockdowns will be important to keep on the radar. 4. CFTC Analysis Latest CFTC data showed a positioning change of +4955 with a net non-commercial position of +13861. The NZD reflects net-long positioning for both large speculators as well as leveraged funds but are nowhere near stress levels right now. With the NZD now sitting on the highest cash rate among the major economies and with expectations of that to continue to rise we think carry attractiveness will become a key focus point for the NZD in the months ahead and should mean a favourable upside bias for the NZD against the low yielders like JPY and CHF. In the shortterm though, as we mentioned above, the virus situation could see some of the recent upside given back, and also keep overall risk sentiment in mind which saw the NZD failing to benefit from the stellar quarterly jobs data released last week USD FUNDAMENTAL BIAS: WEAK BULLISH 1. The Monetary Policy outlook for the FED Another bank that was hawkish in deed by dovish in word in their Nov policy decision. The Fed official announced tapering as expected, with purchases said to be reduced this month at a pace of $10bln in Treasuries and $5bln in MBS per month and explained that a mid-2022 conclusion is still their base case. There were also some hawkish language changes about inflation, with the bank dropping previous comments that called inflation transitory and replacing it with ‘expected to be transitory’, basically leaving some optionality to pivot more aggressively with tapering should price pressures stay sticky for too long. However, Fed Chair Powell did a really good job to put on a familiar dovish front by explaining that they see the current price pressures as driven by supply bottlenecks and still see those pressures cooling down in in 1H22, essentially giving themselves half a year of ‘tolerating’ the current inflation overshoot. Apart from that, Chair Powell explained that they would need to see maximum employment before their conditions for a lift off in rates would be met, and also explained that its likely that full employment could be reached by mid-2022. That endorsed the idea that a 2h22 hike is possible, but the Chair refused to provide any idea of what maximum employment would look like. On the rate front, Powell also explained that they think they can be patient with rates right now as they want more time to see in what shape the economy is in after the current covid shocks have calmed and after bottlenecks have eased. Overall, a policy meeting that was hawkish in their actions but dovish in their words. 2. Real Yields With a Q4 taper start and mid-2022 taper conclusion on the card, we think further downside in real yields will be a struggle and the probability are skewed higher given the outlook for growth, inflation and policy, and higher real yields should be supportive for the USD in the med-term. 3. The global risk outlook One supporting factor for the USD from June was the onset of downside surprises in global growth. However, there has been a growing chorus of market participants looking for a possible bounce in growth data in Q4 after the covid and supply chain related slowdown in Q3. If we do indeed see a pickup in growth, while inflation is still elevated, that would mean a reflationary environment, which is usually a negative input for the Dollar, so we want to keep that in mind when assessing the incoming US economic data in the next few weeks. 4. Economic Data With the FOMC in the mix, the other economic data points largely took a back seat this past week, with even NFP not really creating a lot of meaningful or sustainable volatility. We did however see a late session sell-off in the Dollar, which was arguably more driven by technical factors as the Dollar topped out at key technical resistance and could also have been some profit taking after the recent push higher. This upcoming week’s main economic event will be Oct CPI and will be an event worth keeping on the radar after this past week’s FOMC. 5. CFTC Analysis Latest CFTC data showed a positioning change of +525 with a net non-commercial position of +34982. Positioning isn’t anywhere near stress levels for the USD, but the speed of the build-up in large specular positioning has been sizeable on a 1-year look back period. Thus, even though the med-term bias remains unchanged, it does mean the USD could be sensitive to mean reversion risks just like we saw on Friday while we are still trading close to YTD highs.
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CAD CHF - FUNDAMENTAL DRIVERSCAD FUNDAMENTAL BIAS: BULLISH 1. The Monetary Policy outlook for the BoC At their Oct meeting the bank surprised markets by decided to put an early end to their QE purchases and also updated their forward guidance to suggest and earlier lift off in rates by explaining that they now see economic slack being absorbed by die middle quarters of 2022. The initial reaction was very bullish as one would expect and saw the CAD appreciate across the board. We think the biggest risk to further upside for the CAD from here is the fact that a lot of these positives that was confirmed by the BoC has already been reflected in both the CAD and rates markets over the past few weeks. The CAD has seen a similar run to the upside back in 1Q21 with the BoC’s hawkish tilt, and similarly to that we feel current prices for rates and the CAD already reflect a great deal of the positives. Thus, even though the med-term outlook remains tilted to the upside for the CAD, there is the risk of seeing some unwind of the recent upside and is something to be mindful of when making any med-term allocations to the upside in the CAD. 2. Commodity-linked currency with dependency on Oil exports Oil staged a massive recovery after hitting rock bottom in 2020 and the move higher over recent months has been driven by supply & demand (OPEC’s production cuts); improving global economic outlook and improving oil demand outlook, even though slightly pushed back by Delta concerns; rising inflation expectations. Even though further gains for Oil will arguably prove to be an uphill battle, the bias remains higher in the med-term as long as current supportive factors and drivers remains intact. There will of course be short-term ebbs and flows which could affect the CAD from an intermarket point of view, but as long as the med-term view for Oil remains higher it should be supportive for Petro-currencies like the CAD. The recent energy crisis affecting large parts of the globe has placed upside pressure in Oil , Gas and Coal and has support the CAD. A possible risk for Oil prices (and by connection the CAD) is any attempts by the US or OPEC+ to calm down prices. On the US side they could opt to release more of their reserves and on OPEC’s side they could announce additional increases in production output. This week we have another OPEC+ meeting so keeping that on the radar for the CAD will be important in the week ahead. 3. Developments surrounding the global risk outlook. As a high-beta currency, the CAD benefited from the market's improving risk outlook coming out of the pandemic as participants moved out of safe-havens. As a pro-cyclical currency, the CAD enjoyed upside alongside other cyclical assets supported by reflation and post-recession recovery best. If expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the CAD in the med-term , but recent short-term jitters are a timely reminder that risk sentiment is also a very important short-term driver. 4. CFTC Analysis Latest CFTC data showed a positioning change of +14244 with a net non-commercial position of +3320. With a lot of positives in the price for the CAD and the front-end yields, it is however encouraging to see that positioning isn’t stretched for either large specs or leveraged funds, and suggest that further upside could of course be possible if short-term sentiment for oil and risk assets remain favourable. CHF FUNDAMENTAL BIAS: BEARISH 1. Developments surrounding the global risk outlook. As a safe-haven currency, the market's risk outlook is the primary driver for the CHF with Swiss economic data or SNB policy meetings rarely being very market moving. Although SNB intervention can have a substantial impact on CHF, its impact tends to be relatively short-lived. Additionally, the SNB are unlikely to adjust policy anytime soon, given their overall dovish disposition and preference for being behind the ECB in terms of policy decisions. The market's overall risk tone improved considerably after the pandemic as a result of the global vaccine roll out and the unprecedented amount of monetary policy accommodation and fiscal support from governments. The Delta variant and subsequent impact on growth expectations is of course a sobering reminder that risks remain. Thus, there is still a degree of uncertainty and risks to the overall risk outlook remains which could prove supportive for the safe havens like the CHF should negative factors for the global economy develop. However, on balance the overall risk outlook is still positive in the med-term and barring any major meltdowns in risk assets the bias for the CHF remains bearish in the med-term. 2. Idiosyncratic drivers for the CHF Despite the negative drivers, the CHF saw some surprisingly strength from June. This divergence from the fundamental outlook didn’t make much sense, but the CHF often has a mind of its own and can often move in opposite directions from what short-term sentiment or its fundamental outlook suggests. Recent research from the team has revealed an interesting correlation between the CHF and simultaneous price action in both Gold and the USD which could explain some of the recent price action. We also need to be careful of the possibility of SNB FX intervention. Apart from that, ING investment bank has recently argued that recent CHF strength could be due to the lower inflation in Switzerland compared to the EU which meant that the real trade-weighted CHF has been trading too cheap. They also expanded that the ECB’s bond buying has meant that their balance sheet is expanding more rapidly compared to that of the SNB, which could have been reasons why the SNB did not see the need for any meaningful FX intervention lately. The bottom line is that there are often plenty of idiosyncratic drivers which might or might not impact the CHF and makes short-term price fluctuations a mixed bag for the most part. 3. CFTC Analysis Latest CFTC data showed a positioning change of -1795 with a net non-commercial position of -19379. Positioning has decreased for the CHF with the latest CFTC data, but it’s worth noting that the majority of the CHF’s upside in the recent week took place after Tuesday so will mostly likely only show up in the data for this coming Friday. Even though we expect the currency to continue weakening in the med-term, any drastic escalation in risk off tones could continue to provide support for the safe-haven currency in the short-term and is always something to keep in mind. With the EURCHF pair treading water around the 1.06, UBS believes the pair already entered SNB intervention territory back at 1.07 and looks to fade any further downside in the pair as opportunities to lean into longs. If you choose to trade the CHF, be ready for some unexpected price action from time to time (see driver 2 above).
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USD CAD - FUNDAMENTAL DRIVERSUSD FUNDAMENTAL BIAS: WEAK BULLISH 1. The Monetary Policy outlook for the FED More hawkish than expected sums up the Sep meeting. The FOMC gave the go ahead for a November tapering announcement as long as the economy develops as expected with their criteria for substantial further progress close to being met. The biggest hawkish tilt was the announcement about a faster pace of tapering, with Chair Powell saying there is broad agreement that tapering can be concluded by mid2022. Inflation projections were hawkish, with the Fed projecting Core PCE above their 2% until 2024. On labour, Chair Powell said he thought the substantial further progress threshold for employment was ‘all but met’ and explained that it won’t take a very strong September jobs print for them to start tapering as just a ‘decent’ print will do. The 2022 Dots stayed very close to the June median, but the rate path was much steeper than markets were anticipating with seven hikes expected over the forecast horizon (from just two previously). It is important here to note though that even though the path was steeper, if one compares that to a projected Core PCE >2% for 2022 to 2024, the rate path does not exactly scream fear when it comes to inflation . All in all, it was a hawkish meeting. The upcoming Nov 3rd meeting is expected to see the bank formally announce tapering at a pace of $15 billion per month starting in Dec. With that largely expected, focus will fall on rate expectations where Eurodollar futures imply three hikes between Jun and Dec 2022, which seems too aggressive right now, so any push back or confirmation of that pricing will arguably be a bigger driver for the USD and US rates this week compared to the expected tapering. 2. Real Yields With a Q4 taper start and mid-2022 taper conclusion on the card, we think further downside in real yields will be a struggle and the probability are skewed higher given the outlook for growth, inflation and policy, and higher real yields should be supportive for the USD in the med-term . 3. The global risk outlook One supporting factor for the USD from June was the onset of downside surprises in global growth. However, there has been a growing chorus of market participants looking for a possible bounce in growth data in Q4 after the covid and supply chain related slowdown in Q3. If we do indeed see a pickup in growth, while inflation is still elevated, that would mean a reflationary environment, which is usually a negative input for the Dollar, so we want to keep that in mind when assessing the incoming US economic data in the next few weeks. 4. Economic Data Very busy week for economic data with NFP on Friday and the usual slew of economic data that feeds into NFP being releases throughout the week (ISM reports, ADP). However, with the FOMC coming up on Wednesday, the data feeding into NFP will most likely take a back seat until we hear from the Fed and depending on the type of tone that will largely impact how markets react to Friday’s NFP release. 5. CFTC Analysis Latest CFTC data showed a positioning change of -1477 with a net non-commercial position of +34457. Positioning isn’t anywhere near stress levels for the USD, but the speed of the build-up in large specular positioning has been sizeable on a 1-year look back period. Thus, even though the med-term bias remains unchanged, it does mean the USD could be sensitive to mean reversion risks while still trading close to YTD highs. This week’s FOMC will take centre stage though. CAD FUNDAMENTAL BIAS: BULLISH 1. The Monetary Policy outlook for the BoC At their Oct meeting the bank surprised markets by decided to put an early end to their QE purchases and also updated their forward guidance to suggest and earlier lift off in rates by explaining that they now see economic slack being absorbed by die middle quarters of 2022. The initial reaction was very bullish as one would expect and saw the CAD appreciate across the board. We think the biggest risk to further upside for the CAD from here is the fact that a lot of these positives that was confirmed by the BoC has already been reflected in both the CAD and rates markets over the past few weeks. The CAD has seen a similar run to the upside back in 1Q21 with the BoC’s hawkish tilt, and similarly to that we feel current prices for rates and the CAD already reflect a great deal of the positives. Thus, even though the med-term outlook remains tilted to the upside for the CAD, there is the risk of seeing some unwind of the recent upside and is something to be mindful of when making any med-term allocations to the upside in the CAD. 2. Commodity-linked currency with dependency on Oil exports Oil staged a massive recovery after hitting rock bottom in 2020 and the move higher over recent months has been driven by supply & demand (OPEC’s production cuts); improving global economic outlook and improving oil demand outlook, even though slightly pushed back by Delta concerns; rising inflation expectations. Even though further gains for Oil will arguably prove to be an uphill battle, the bias remains higher in the med-term as long as current supportive factors and drivers remains intact. There will of course be short-term ebbs and flows which could affect the CAD from an intermarket point of view, but as long as the med-term view for Oil remains higher it should be supportive for Petro-currencies like the CAD. The recent energy crisis affecting large parts of the globe has placed upside pressure in Oil , Gas and Coal and has support the CAD. A possible risk for Oil prices (and by connection the CAD) is any attempts by the US or OPEC+ to calm down prices. On the US side they could opt to release more of their reserves and on OPEC’s side they could announce additional increases in production output. This week we have another OPEC+ meeting so keeping that on the radar for the CAD will be important in the week ahead. 3. Developments surrounding the global risk outlook. As a high-beta currency, the CAD benefited from the market's improving risk outlook coming out of the pandemic as participants moved out of safe-havens. As a pro-cyclical currency, the CAD enjoyed upside alongside other cyclical assets supported by reflation and post-recession recovery best. If expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the CAD in the med-term , but recent short-term jitters are a timely reminder that risk sentiment is also a very important short-term driver. 4. CFTC Analysis Latest CFTC data showed a positioning change of +14244 with a net non-commercial position of +3320. With a lot of positives in the price for the CAD and the front-end yields, it is however encouraging to see that positioning isn’t stretched for either large specs or leveraged funds, and suggest that further upside could of course be possible if short-term sentiment for oil and risk assets remain favourable.
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NZD USD - FUNDAMENTAL DRIVERSNZD FUNDAMENTAL BIAS: BULLISH 1. The Monetary Policy outlook for the RBNZ At their Oct meeting, the RBNZ delivered on expectations to raise the OCR to 0.50%. As the hike was already fully priced, the lack of new hawkish tones we saw a textbook buy-the-rumour-sell-the-fact reaction in the NZD pushing lower. There was additional focus on the RBNZ expecting headline CPI to climb above 4 percent in the near term, but the most important part of the statement was the subsequent comment that the bank still sees CPI returning towards the 2 percent midpoint over the medium term and that ‘the current COVID-19-related restrictions have not materially changed the medium-term outlook for inflation and employment since the August Statement’. Thus, despite recent covid concerns, inflation concerns and energy concerns, that part of the statement acknowledged that nothing has changed in terms of the bank’s OCR projections released at the August meeting. Unsurprisingly, the bank also stated that their future rate path is contingent on the medium-term outlook for inflation and employment, which means keeping close tabs on incoming data and the virus situation will remain a key focus for us in the weeks and months ahead. With the bank now being the first to hike rates among the major central banks and sitting on the highest cash rate among the majors, and with an OCR projection that is still head and shoulders above the rest, the bias for the NZD remains firmly titled to the upside, and as rates keeps rising, the currency’s carry attractiveness will be a key focus point for the NZD in the months ahead. 2. Developments surrounding the global risk outlook. As a high-beta currency, the NZD benefited from the market's improving risk outlook coming out of the pandemic as participants moved out of safe-havens. As a pro-cyclical currency, the NZD enjoyed upside alongside other cyclical assets supported by reflation and post-recession recovery best. If expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the NZD in the med-term , but recent short-term jitters are a timely reminder that risk sentiment is also a very important short-term driver. 3. Economic and health developments Virus cases can still have an impact on NZD sentiment, which means the fact that NZ virus cases is at record high levels is something to pay attention to. For now, it’s had very limited impact on the NZD due to the NZ government abandoning their covid-zero strategy and since virus risks have been downplayed by the RBNZ, but further escalation leading to more lockdowns will be important to keep on the radar. 4. CFTC Analysis Latest CFTC data showed a positioning change of +2466 with a net non-commercial position of +8906. The NZD reflects net-long positioning for both large speculators as well as leveraged funds but are nowhere near stress levels right now. With the NZD now sitting on the highest cash rate among the major economies and with expectations of that to continue to rise we think carry attractiveness will become a key focus point for the NZD in the months ahead and should mean a favourable upside bias for the NZD against the low yielders like JPY and CHF. In the shortterm though, as we mentioned above, the virus situation could see some of the recent upside given back, and also keep in mind that we have quarterly employment data due on Wednesday night which will be an important one to keep on the radar. USD FUNDAMENTAL BIAS: WEAK BULLISH 1. The Monetary Policy outlook for the FED More hawkish than expected sums up the Sep meeting. The FOMC gave the go ahead for a November tapering announcement as long as the economy develops as expected with their criteria for substantial further progress close to being met. The biggest hawkish tilt was the announcement about a faster pace of tapering, with Chair Powell saying there is broad agreement that tapering can be concluded by mid2022. Inflation projections were hawkish, with the Fed projecting Core PCE above their 2% until 2024. On labour, Chair Powell said he thought the substantial further progress threshold for employment was ‘all but met’ and explained that it won’t take a very strong September jobs print for them to start tapering as just a ‘decent’ print will do. The 2022 Dots stayed very close to the June median, but the rate path was much steeper than markets were anticipating with seven hikes expected over the forecast horizon (from just two previously). It is important here to note though that even though the path was steeper, if one compares that to a projected Core PCE >2% for 2022 to 2024, the rate path does not exactly scream fear when it comes to inflation. All in all, it was a hawkish meeting. The upcoming Nov 3rd meeting is expected to see the bank formally announce tapering at a pace of $15 billion per month starting in Dec. With that largely expected, focus will fall on rate expectations where Eurodollar futures imply three hikes between Jun and Dec 2022, which seems too aggressive right now, so any push back or confirmation of that pricing will arguably be a bigger driver for the USD and US rates this week compared to the expected tapering. 2. Real Yields With a Q4 taper start and mid-2022 taper conclusion on the card, we think further downside in real yields will be a struggle and the probability are skewed higher given the outlook for growth, inflation and policy, and higher real yields should be supportive for the USD in the med-term. 3. The global risk outlook One supporting factor for the USD from June was the onset of downside surprises in global growth. However, there has been a growing chorus of market participants looking for a possible bounce in growth data in Q4 after the covid and supply chain related slowdown in Q3. If we do indeed see a pickup in growth, while inflation is still elevated, that would mean a reflationary environment, which is usually a negative input for the Dollar, so we want to keep that in mind when assessing the incoming US economic data in the next few weeks. 4. Economic Data Very busy week for economic data with NFP on Friday and the usual slew of economic data that feeds into NFP being releases throughout the week (ISM reports, ADP). However, with the FOMC coming up on Wednesday, the data feeding into NFP will most likely take a back seat until we hear from the Fed and depending on the type of tone that will largely impact how markets react to Friday’s NFP release. 5. CFTC Analysis Latest CFTC data showed a positioning change of -1477 with a net non-commercial position of +34457. Positioning isn’t anywhere near stress levels for the USD, but the speed of the build-up in large specular positioning has been sizeable on a 1-year look back period. Thus, even though the med-term bias remains unchanged, it does mean the USD could be sensitive to mean reversion risks while still trading close to YTD highs. This week’s FOMC will take centre stage though.
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GBP JPY - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL BIAS: BULLISH 1. The Monetary Policy outlook for the BOE The Sep policy meeting from the BoE saw money markets rushing to price in a much faster and more aggressive policy path than previously expected. Even though this of course falls in line with our bullish bias for the Pound, we do think the market is a bit too aggressive too quick right now. The bank did explain that they now see inflation above 4% by Q4 of this year, and the possibility of more sticky inflation was the key reasons why we saw a 7-2 QE vote split with Saunders and Ramsden both dissenting to cut purchases. However, it’s important to note that the remaining 7 members still see inflation as transitory, and the fact that they expect CPI above 4% means any prints that don’t come close to that poses downside risks. Furthermore, even though the bank said their expectations of modest tightening has strengthened, the admitted that lots of uncertainties remain. A big one of these is the labour market, where even though the number of furloughed staff have decreased, that decrease has materially slowed from August which poses more uncertainty for the labour market. Thus, even though our bias remains unchanged, and we see the bank lifting rates in Q4, we do think the over optimistic moves in money markets poses short-term headwinds. Make sure to catch this week’s Top Trading Opportunity Report and Week Ahead Video in the terminal for more info on the event. 2. The country’s economic developments The successful vaccination program that allowed the UK to open faster and sooner than peers provided a favourable environment for Sterling and the strength of the economic recovery has meant solid growth differentials favouring GBP. However, a lot of these positives are arguably priced, and the recent slowdown in activity data that suggests peak growth has been reached and could mean an uphill push for GBP to see the same outperformance we saw earlier. With our above comments about money markets, it also means that there is now more risk to downside surprises than was the case a few months ago. 3. Political Developments Even though a Brexit deal was reached last year, some issues like the Northern Ireland protocol remains, and with neither side willing to budge it seems like these issues. Two weeks ago, the EU ramped up some political posturing with reports that said they are mulling terminating the Brexit deal if the UK triggers Article 16. For now, these are just threats, but with rates markets still very aggressively priced any further escalation could increase the odds of seeing repricing downside in the GBP, so one to keep on the radar alongside the fishing row with France. 4. CFTC Analysis Latest CFTC data showed a positioning change of +13338 with a net non-commercial position of +14953. Sterling have seen a very impressive rebound from recent lows as markets reacted positively to recent BoE comments which sparked additional downside in SONIA futures and expectations of higher rates. Right now, money markets are pricing in a 15-basis point hike in Q4 and four additional 25-basis point hikes by end 2022. Even though GBP has enjoyed a bounce back in positioning, Sterling has been mostly rangebound since the start of September as traders arguably want to keep their powder dry for this week’s very important BoE policy decision. Positioning is not in stress territory for large specs or leveraged funds which means positioning shouldn’t affect either hawkish or dovish tilts from the BoE this week. JPY FUNDAMENTAL BIAS: BEARISH 1. Safe-haven status and overall risk outlook As a safe-haven currency, the market's risk outlook is the primary driver of JPY. Economic data rarely proves market moving; and although monetary policy expectations can prove highly market-moving in the short-term, safe-haven flows are typically the more dominant factor. The market's overall risk tone has improved considerably following the pandemic with good news about successful vaccinations, and ongoing monetary and fiscal policy support paved the way for markets to expect a robust global economic recovery. Of course, there remains many uncertainties and many countries are continuing to fight virus waves, but as a whole the outlook has kept on improving over the past couple of months, which would expect safe-haven demand to diminish and result in a bearish outlook for the JPY. 2. Low-yielding currency with inverse correlation to US10Y As a low yielding currency, the JPY usually shares an inverse correlation to strong moves in yield differentials, more specifically in strong moves in US10Y . However, like most correlations, the strength of the inverse correlation between the JPY and US10Y is not perfect and will ebb and flow depending on the type of market environment from a risk and cycle point of view. With bond yields looking a bit stretched at the current levels any decent mean reversion is expected to be supportive for the JPY, so it remains a key asset class to keep track. 3. CFTC Analysis Latest CFTC data showed a positioning change of -4302 with a net non-commercial position of -107036. The past few weeks of price action in the JPY was mostly driven by the excessive moves we saw in yields on the US side but was also exacerbated by risk on flows and rising oil prices which is a negative driver for Japan for its terms of trade. Even though the bias for the JPY remains firmly tilted to the downside, the moves across JPY pairs is arguably still looking stretched, and with both large speculators and leveraged funds firmly in net-short territory the odds of some mean reversion has increased. We would prefer waiting for some of the froth to mean revert before looking for new JPY shorts. As always, any major risk off flows can still support the JPY, especially with quite a sizable net-short position still built up in the currency for large speculators as well as leveraged funds, but rates have been the key driver in the short-term.
by thunderpips
1
CAD JPY - FUNDAMENTAL DRIVERSCAD FUNDAMENTAL BIAS: BULLISH 1. The Monetary Policy outlook for the BoC At their Oct meeting the bank surprised markets by decided to put an early end to their QE purchases and also updated their forward guidance to suggest and earlier lift off in rates by explaining that they now see economic slack being absorbed by die middle quarters of 2022. The initial reaction was very bullish as one would expect and saw the CAD appreciate across the board. We think the biggest risk to further upside for the CAD from here is the fact that a lot of these positives that was confirmed by the BoC has already been reflected in both the CAD and rates markets over the past few weeks. The CAD has seen a similar run to the upside back in 1Q21 with the BoC’s hawkish tilt, and similarly to that we feel current prices for rates and the CAD already reflect a great deal of the positives. Thus, even though the med-term outlook remains tilted to the upside for the CAD, there is the risk of seeing some unwind of the recent upside and is something to be mindful of when making any med-term allocations to the upside in the CAD. 2. Commodity-linked currency with dependency on Oil exports Oil staged a massive recovery after hitting rock bottom in 2020 and the move higher over recent months has been driven by supply & demand (OPEC’s production cuts); improving global economic outlook and improving oil demand outlook, even though slightly pushed back by Delta concerns; rising inflation expectations. Even though further gains for Oil will arguably prove to be an uphill battle, the bias remains higher in the med-term as long as current supportive factors and drivers remains intact. There will of course be short-term ebbs and flows which could affect the CAD from an intermarket point of view, but as long as the med-term view for Oil remains higher it should be supportive for Petro-currencies like the CAD. The recent energy crisis affecting large parts of the globe has placed upside pressure in Oil, Gas and Coal and has support the CAD. A possible risk for Oil prices (and by connection the CAD) is any attempts by the US or OPEC+ to calm down prices. On the US side they could opt to release more of their reserves and on OPEC’s side they could announce additional increases in production output. This week we have another OPEC+ meeting so keeping that on the radar for the CAD will be important in the week ahead. 3. Developments surrounding the global risk outlook. As a high-beta currency, the CAD benefited from the market's improving risk outlook coming out of the pandemic as participants moved out of safe-havens. As a pro-cyclical currency, the CAD enjoyed upside alongside other cyclical assets supported by reflation and post-recession recovery best. If expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the CAD in the med-term, but recent short-term jitters are a timely reminder that risk sentiment is also a very important short-term driver. 4. CFTC Analysis Latest CFTC data showed a positioning change of +14244 with a net non-commercial position of +3320. With a lot of positives in the price for the CAD and the front-end yields, it is however encouraging to see that positioning isn’t stretched for either large specs or leveraged funds, and suggest that further upside could of course be possible if short-term sentiment for oil and risk assets remain favourable. JPY FUNDAMENTAL BIAS: BEARISH 1. Safe-haven status and overall risk outlook As a safe-haven currency, the market's risk outlook is the primary driver of JPY. Economic data rarely proves market moving; and although monetary policy expectations can prove highly market-moving in the short-term, safe-haven flows are typically the more dominant factor. The market's overall risk tone has improved considerably following the pandemic with good news about successful vaccinations, and ongoing monetary and fiscal policy support paved the way for markets to expect a robust global economic recovery. Of course, there remains many uncertainties and many countries are continuing to fight virus waves, but as a whole the outlook has kept on improving over the past couple of months, which would expect safe-haven demand to diminish and result in a bearish outlook for the JPY. 2. Low-yielding currency with inverse correlation to US10Y As a low yielding currency, the JPY usually shares an inverse correlation to strong moves in yield differentials, more specifically in strong moves in US10Y. However, like most correlations, the strength of the inverse correlation between the JPY and US10Y is not perfect and will ebb and flow depending on the type of market environment from a risk and cycle point of view. With bond yields looking a bit stretched at the current levels any decent mean reversion is expected to be supportive for the JPY, so it remains a key asset class to keep track. 3. CFTC Analysis Latest CFTC data showed a positioning change of -4302 with a net non-commercial position of -107036. The past few weeks of price action in the JPY was mostly driven by the excessive moves we saw in yields on the US side but was also exacerbated by risk on flows and rising oil prices which is a negative driver for Japan for its terms of trade. Even though the bias for the JPY remains firmly tilted to the downside, the moves across JPY pairs is arguably still looking stretched, and with both large speculators and leveraged funds firmly in net-short territory the odds of some mean reversion has increased. We would prefer waiting for some of the froth to mean revert before looking for new JPY shorts. As always, any major risk off flows can still support the JPY, especially with quite a sizable net-short position still built up in the currency for large speculators as well as leveraged funds, but rates have been the key driver in the short-term.
by thunderpips
1
DOLLAR INDEX - FUNDAMENTAL DRIVERSUSD FUNDAMENTAL BIAS: WEAK BULLISH 1. The Monetary Policy outlook for the FED More hawkish than expected sums up the Sep meeting. The FOMC gave the go ahead for a November tapering announcement as long as the economy develops as expected with their criteria for substantial further progress close to being met. The biggest hawkish tilt was the announcement about a faster pace of tapering, with Chair Powell saying there is broad agreement that tapering can be concluded by mid2022. Inflation projections were hawkish, with the Fed projecting Core PCE above their 2% until 2024. On labour, Chair Powell said he thought the substantial further progress threshold for employment was ‘all but met’ and explained that it won’t take a very strong September jobs print for them to start tapering as just a ‘decent’ print will do. The 2022 Dots stayed very close to the June median, but the rate path was much steeper than markets were anticipating with seven hikes expected over the forecast horizon (from just two previously). It is important here to note though that even though the path was steeper, if one compares that to a projected Core PCE >2% for 2022 to 2024, the rate path does not exactly scream fear when it comes to inflation . All in all, it was a hawkish meeting. Interestingly, it took markets about three days to realize this as the expected price action only really took hold of markets a few days later. A faster tapering was a key factor we were watching for an incrementally bullish tilt in the outlook, so market’s initial reactions were surprising. However, with the recent breakout in both US yields and the USD, this has given us more confidence in moving our fundamental outlook for the Dollar from Neutral to Weak Bullish . 2. Real Yields With a Q4 taper start and mid-2022 taper conclusion on the card, we think further downside in real yields will be a struggle and the probability are skewed higher given the outlook for growth, inflation and policy, and higher real yields should be supportive for the USD in the med-term . 3. The global risk outlook One supporting factor for the USD from June was the onset of downside surprises in global growth. However, recent Covid-19 case data from ourworldindata. org has shown a sharp deceleration in new cases globally. Using past occurrences as a template, the reduction in cases is likely to lead to less restrictive measures, which is likely to lead to a strong bounce in economic activity. Thus, even though we have shifted our bias to weak bullish in the med-term , the fall in cases and increased likelihood of a bounce in economic activity could mean downside for the USD from a short to intermediate time horizon (remember a re-acceleration in growth and potentially inflation = reflation) 4. Economic Data Economic data will be very light in the incoming week with the main highlight being IHS Markit Flash PMI data. However, also keep in mind that the Fed has largely taken the sting out of economic data going into the November FOMC meeting as they have already acknowledged a November taper announcement as well as a possible mid-2022 conclusion. Thus, even though economic data will still be important, it is unlikely that incoming data will sway the Fed from their tapering plans. 5. CFTC Analysis Latest CFTC data showed a positioning change of +3036 with a net non-commercial position of +35062. Positioning isn’t anywhere near stress levels for the USD, but the speed of the build-up in large specular positioning measures over 2-standard deviation on a 1-year, 6-month and 3- month look back period. Thus, even though the med-term bias remains unchanged, it does mean the USD could be sensitive to mean reversion risks while still trading close to YTD highs. Thus, reflationary data and overall risk sentiment will be a focus for the USD.
TVC:DXY
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2
NZD USD - FUNDAMENTAL DRIVERSNZD FUNDAMENTAL BIAS: BULLISH 1. The Monetary Policy outlook for the RBNZ At their October meeting, the RBNZ delivered on market expectations and raised the OCR by 25-basis points to an OCR of 0.50%. As the 25- basis point hike was already fully priced in, the fact that the bank did not provide any new additional information saw a textbook buy-therumour-sell-the-fact price reaction with the NZD pushing lower. As has recently been the case with most central bank commentary, there was additional focus on the RBNZ expecting that headline CPI inflation to increase above 4 percent in the near term, but the most important part of that part of the statement was the subsequent comment that the bank still sees CPI returning towards the 2 percent midpoint over the medium term. Furthermore, the most important take away from the RBNZ statement for us was that ‘the current COVID-19-related restrictions have not materially changed the medium-term outlook for inflation and employment since the August Statement’. Thus, despite recent covid concerns, inflation concerns and energy concerns, that part of the statement acknowledged that nothing has changed in terms of the bank’s OCR projections released at the August meeting. Unsurprisingly, the bank also stated that their future rate path is contingent on the mediumterm outlook for inflation and employment, which means keeping close tabs on incoming data and the virus situation will remain a key focus for us in the weeks and months ahead. With the bank now being the first to hike rates among the major central banks and sitting on the highest cash rate among the majors, and with an OCR projection that is still head and shoulders above the rest, the bias for the NZD remains firmly titled to the upside as the bank remains the most hawkish among the major central banks. As interest rates keeps rising, we think the currency’s carry attractiveness will be a key focus point for the NZD in the months ahead. 2. Developments surrounding the global risk outlook. As a high-beta currency, the NZD benefited from the market's improving risk outlook coming out of the pandemic as participants moved out of safe-havens. As a pro-cyclical currency, the NZD enjoyed upside alongside other cyclical assets supported by reflation and post-recession recovery best. If expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the NZD in the med-term, but recent short-term jitters are a timely reminder that risk sentiment is also a very important short-term driver. 3. Economic and health developments So far, the virus situation in New Zealand has been a flash in the pan worry. The government has been able to trace the source of the recent outbreak and should be able to keep the situation under control. Any further escalation though will be important to watch. 4. CFTC Analysis Latest CFTC data showed a positioning change of +692 with a net non-commercial position of +8748. The NZD reflects net-long positioning for both large speculators as well as leveraged funds but are nowhere near stress levels right now. With the NZD now sitting on the highest cash rate among the major economies and with expectations of that to continue to rise we think carry attractiveness will become a key focus point for the NZD in the months ahead and should mean a favourable upside bias for the NZD against the low yielders like JPY and CHF. USD FUNDAMENTAL BIAS: WEAK BULLISH 1. The Monetary Policy outlook for the FED More hawkish than expected sums up the Sep meeting. The FOMC gave the go ahead for a November tapering announcement as long as the economy develops as expected with their criteria for substantial further progress close to being met. The biggest hawkish tilt was the announcement about a faster pace of tapering, with Chair Powell saying there is broad agreement that tapering can be concluded by mid2022. Inflation projections were hawkish, with the Fed projecting Core PCE above their 2% until 2024. On labour, Chair Powell said he thought the substantial further progress threshold for employment was ‘all but met’ and explained that it won’t take a very strong September jobs print for them to start tapering as just a ‘decent’ print will do. The 2022 Dots stayed very close to the June median, but the rate path was much steeper than markets were anticipating with seven hikes expected over the forecast horizon (from just two previously). It is important here to note though that even though the path was steeper, if one compares that to a projected Core PCE >2% for 2022 to 2024, the rate path does not exactly scream fear when it comes to inflation . All in all, it was a hawkish meeting. Interestingly, it took markets about three days to realize this as the expected price action only really took hold of markets a few days later. A faster tapering was a key factor we were watching for an incrementally bullish tilt in the outlook, so market’s initial reactions were surprising. However, with the recent breakout in both US yields and the USD, this has given us more confidence in moving our fundamental outlook for the Dollar from Neutral to Weak Bullish . 2. Real Yields With a Q4 taper start and mid-2022 taper conclusion on the card, we think further downside in real yields will be a struggle and the probability are skewed higher given the outlook for growth, inflation and policy, and higher real yields should be supportive for the USD in the med-term . 3. The global risk outlook One supporting factor for the USD from June was the onset of downside surprises in global growth. However, recent Covid-19 case data from ourworldindata. org has shown a sharp deceleration in new cases globally. Using past occurrences as a template, the reduction in cases is likely to lead to less restrictive measures, which is likely to lead to a strong bounce in economic activity. Thus, even though we have shifted our bias to weak bullish in the med-term , the fall in cases and increased likelihood of a bounce in economic activity could mean downside for the USD from a short to intermediate time horizon (remember a re-acceleration in growth and potentially inflation = reflation) 4. Economic Data Economic data will be very light in the incoming week with the main highlight being IHS Markit Flash PMI data. However, also keep in mind that the Fed has largely taken the sting out of economic data going into the November FOMC meeting as they have already acknowledged a November taper announcement as well as a possible mid-2022 conclusion. Thus, even though economic data will still be important, it is unlikely that incoming data will sway the Fed from their tapering plans. 5. CFTC Analysis Latest CFTC data showed a positioning change of +3036 with a net non-commercial position of +35062. Positioning isn’t anywhere near stress levels for the USD, but the speed of the build-up in large specular positioning measures over 2-standard deviation on a 1-year, 6-month and 3- month look back period. Thus, even though the med-term bias remains unchanged, it does mean the USD could be sensitive to mean reversion risks while still trading close to YTD highs. Thus, reflationary data and overall risk sentiment will be a focus for the USD.
by thunderpips
2
NZD JPY - FUNDAMENTAL DRIVERSNZD FUNDAMENTAL BIAS: BULLISH 1. The Monetary Policy outlook for the RBNZ At their October meeting, the RBNZ delivered on market expectations and raised the OCR by 25-basis points to an OCR of 0.50%. As the 25- basis point hike was already fully priced in, the fact that the bank did not provide any new additional information saw a textbook buy-therumour-sell-the-fact price reaction with the NZD pushing lower. As has recently been the case with most central bank commentary, there was additional focus on the RBNZ expecting that headline CPI inflation to increase above 4 percent in the near term, but the most important part of that part of the statement was the subsequent comment that the bank still sees CPI returning towards the 2 percent midpoint over the medium term. Furthermore, the most important take away from the RBNZ statement for us was that ‘the current COVID-19-related restrictions have not materially changed the medium-term outlook for inflation and employment since the August Statement’. Thus, despite recent covid concerns, inflation concerns and energy concerns, that part of the statement acknowledged that nothing has changed in terms of the bank’s OCR projections released at the August meeting. Unsurprisingly, the bank also stated that their future rate path is contingent on the mediumterm outlook for inflation and employment, which means keeping close tabs on incoming data and the virus situation will remain a key focus for us in the weeks and months ahead. With the bank now being the first to hike rates among the major central banks and sitting on the highest cash rate among the majors, and with an OCR projection that is still head and shoulders above the rest, the bias for the NZD remains firmly titled to the upside as the bank remains the most hawkish among the major central banks. As interest rates keeps rising, we think the currency’s carry attractiveness will be a key focus point for the NZD in the months ahead. 2. Developments surrounding the global risk outlook. As a high-beta currency, the NZD benefited from the market's improving risk outlook coming out of the pandemic as participants moved out of safe-havens. As a pro-cyclical currency, the NZD enjoyed upside alongside other cyclical assets supported by reflation and post-recession recovery best. If expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the NZD in the med-term, but recent short-term jitters are a timely reminder that risk sentiment is also a very important short-term driver. 3. Economic and health developments So far, the virus situation in New Zealand has been a flash in the pan worry. The government has been able to trace the source of the recent outbreak and should be able to keep the situation under control. Any further escalation though will be important to watch. 4. CFTC Analysis Latest CFTC data showed a positioning change of +692 with a net non-commercial position of +8748. The NZD reflects net-long positioning for both large speculators as well as leveraged funds but are nowhere near stress levels right now. With the NZD now sitting on the highest cash rate among the major economies and with expectations of that to continue to rise we think carry attractiveness will become a key focus point for the NZD in the months ahead and should mean a favourable upside bias for the NZD against the low yielders like JPY and CHF. JPY FUNDAMENTAL BIAS: BEARISH 1. Safe-haven status and overall risk outlook As a safe-haven currency, the market's risk outlook is the primary driver of JPY. Economic data rarely proves market moving; and although monetary policy expectations can prove highly market-moving in the short-term, safe-haven flows are typically the more dominant factor. The market's overall risk tone has improved considerably following the pandemic with good news about successful vaccinations, and ongoing monetary and fiscal policy support paved the way for markets to expect a robust global economic recovery. Of course, there remains many uncertainties and many countries are continuing to fight virus waves, but as a whole the outlook has kept on improving over the past couple of months, which would expect safe-haven demand to diminish and result in a bearish outlook for the JPY. 2. Low-yielding currency with inverse correlation to US10Y As a low yielding currency, the JPY usually shares an inverse correlation to strong moves in yield differentials, more specifically in strong moves in US10Y . However, like most correlations, the strength of the inverse correlation between the JPY and US10Y is not perfect and will ebb and flow depending on the type of market environment from a risk and cycle point of view. The rangebound price action in US10Y from July saw our conviction for more upside in USDJPY take a knock, and we have been waiting for US10Y to make a more sustainable break before we look to add longs in USDJPY . This week, we finally saw US10Y being able to clear the key 1.38% level that has acted as strong resistance since July. Thus, as long as US10Y manages to stay above 1.38% we would look for pull backs in USDJPY to look for med-term buy opportunities. However, since 1.38% was such a key level, any break and close below 1.38% for the US10Y would be an automatic trigger to reduce any exposure. 3. CFTC Analysis Latest CFTC data showed a positioning change of -12940 with a net non-commercial position of -76634. The past few days of price action in the JPY was mostly driven by the excessive moves we saw in yields on the US side, with US10Y continuing to grind higher, but was also exacerbated by risk on flows as well as rising oil prices which is a negative driver for Japan for its terms of trade. Even though the bias for the JPY remains firmly tilted to the downside, the move is looking stretched, and with both large speculators and leveraged funds firmly in netshort territory the odds of some mean reversion has increased, and we would prefer waiting for some of the froth to mean revert before looking for new JPY shorts. As always, any major risk off flows can still support the JPY, especially with quite a sizable net-short position still built up in the currency for large speculators as well as leveraged funds.
by thunderpips
1
GBP USD - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL BIAS: BULLISH 1. The Monetary Policy outlook for the BOE The Sep policy meeting from the BoE saw money markets rushing to price in a much faster and more aggressive policy path than previously expected. Even though this of course falls in line with our bullish bias for the Pound, we do think the market is a bit too aggressive too quick right now. The bank did explain that they now see inflation above 4% by Q4 of this year, and the possibility of more sticky inflation was the key reasons why we saw a 7-2 QE vote split with Saunders and Ramsden both dissenting to cut purchases. However, it’s important to note that the remaining 7 members still see inflation as transitory, and the fact that they expect CPI above 4% means any prints that don’t come close to that poses downside risks. Furthermore, even though the bank said their expectations of modest tightening has strengthened, the admitted that lots of uncertainties remain. A big one of these is the labour market, where even though the number of furloughed staff have decreased, that decrease has materially slowed from August which poses more uncertainty for the labour market. Thus, even though our bias remains unchanged, and we see the bank lifting rates in Q1, we do think the over optimistic moves in money markets poses short-term headwinds. 2. The country’s economic developments The successful vaccination program that allowed the UK to open faster and sooner than peers provided a favourable environment for Sterling and the strength of the economic recovery has meant solid growth differentials favouring GBP. However, a lot of these positives are arguably priced, and the recent slowdown in activity data that suggests peak growth has been reached and could mean an uphill push for GBP to see the same outperformance we saw earlier. With our above comments about money markets, it also means that there is now more risk to downside surprises than was the case a few months ago. Even though the current fuel challenges should not be enough to derail the economic recovery, the NatGas shortage is much more serious and if not resolved quickly could add to some additional price pressures which in the past few sessions have seen even more aggressive pricing from money markets for additional tightening. 3. Political Developments Even though a Brexit deal was reached last year, some issues like the Northern Ireland protocol remains, and with neither side willing to budge it seems like these issues could drag on for a long time. For now, Sterling has looked through all the rigmarole as the cans are kicked down the road, but the risks of an article 16 trigger or possible post-Brexit trade sanctions is a risk that we want to keep in the back of our mind. 4. CFTC Analysis Latest CFTC data showed a positioning change of +8039 with a net non-commercial position of -11979. Sterling have seen a very impressive rebound from recent lows with large speculators and leveraged funds at odds on whether it’s a buy or a sell. Markets reacted positively to recent BoE comments which sparked additional downside in SONIA futures , which are now fully priced for a 15-basis point hike in Dec and just shy of pricing in three 25-basis point hikes in 2022. Even though GBP has enjoyed upside on the tightening expectations, the reasons why markets are pricing a steeper rate path is out of fear of inflation and not due to a more positive economic outlook, which as we highlighted above does pose headwinds for the Pound in the weeks ahead if growth or inflation data surprise lower in the weeks ahead. That means this week’s CPI , Retail Sales and PMI data could be very interesting for the GBP, especially if the data surprises to the downside. USD FUNDAMENTAL BIAS: WEAK BULLISH 1. The Monetary Policy outlook for the FED More hawkish than expected sums up the Sep meeting. The FOMC gave the go ahead for a November tapering announcement as long as the economy develops as expected with their criteria for substantial further progress close to being met. The biggest hawkish tilt was the announcement about a faster pace of tapering, with Chair Powell saying there is broad agreement that tapering can be concluded by mid2022. Inflation projections were hawkish, with the Fed projecting Core PCE above their 2% until 2024. On labour, Chair Powell said he thought the substantial further progress threshold for employment was ‘all but met’ and explained that it won’t take a very strong September jobs print for them to start tapering as just a ‘decent’ print will do. The 2022 Dots stayed very close to the June median, but the rate path was much steeper than markets were anticipating with seven hikes expected over the forecast horizon (from just two previously). It is important here to note though that even though the path was steeper, if one compares that to a projected Core PCE >2% for 2022 to 2024, the rate path does not exactly scream fear when it comes to inflation . All in all, it was a hawkish meeting. Interestingly, it took markets about three days to realize this as the expected price action only really took hold of markets a few days later. A faster tapering was a key factor we were watching for an incrementally bullish tilt in the outlook, so market’s initial reactions were surprising. However, with the recent breakout in both US yields and the USD, this has given us more confidence in moving our fundamental outlook for the Dollar from Neutral to Weak Bullish . 2. Real Yields With a Q4 taper start and mid-2022 taper conclusion on the card, we think further downside in real yields will be a struggle and the probability are skewed higher given the outlook for growth, inflation and policy, and higher real yields should be supportive for the USD in the med-term . 3. The global risk outlook One supporting factor for the USD from June was the onset of downside surprises in global growth. However, recent Covid-19 case data from ourworldindata. org has shown a sharp deceleration in new cases globally. Using past occurrences as a template, the reduction in cases is likely to lead to less restrictive measures, which is likely to lead to a strong bounce in economic activity. Thus, even though we have shifted our bias to weak bullish in the med-term , the fall in cases and increased likelihood of a bounce in economic activity could mean downside for the USD from a short to intermediate time horizon (remember a re-acceleration in growth and potentially inflation = reflation) 4. Economic Data Economic data will be very light in the incoming week with the main highlight being IHS Markit Flash PMI data. However, also keep in mind that the Fed has largely taken the sting out of economic data going into the November FOMC meeting as they have already acknowledged a November taper announcement as well as a possible mid-2022 conclusion. Thus, even though economic data will still be important, it is unlikely that incoming data will sway the Fed from their tapering plans. 5. CFTC Analysis Latest CFTC data showed a positioning change of +3036 with a net non-commercial position of +35062. Positioning isn’t anywhere near stress levels for the USD, but the speed of the build-up in large specular positioning measures over 2-standard deviation on a 1-year, 6-month and 3- month look back period. Thus, even though the med-term bias remains unchanged, it does mean the USD could be sensitive to mean reversion risks while still trading close to YTD highs. Thus, reflationary data and overall risk sentiment will be a focus for the USD.
by thunderpips
2