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CAD JPY - FUNDAMENTAL DRIVERSCAD FUNDAMENTAL BIAS: BULLISH 1. The Monetary Policy outlook for the BoC At their September meeting the BoC delivered on market expectations by not providing any new information. The bank acknowledged the recent hit to growth has been bigger than expected, but also explained that they deem the hit to be temporary and still expect solid growth this year. They also reiterated that even though inflation is currently high and expected to climb, they deem current price pressures as being mostly transitory. The meeting did nothing to change the market’s expectations that the bank will go ahead to announce another round of tapering of C$1 billion at their October meeting, especially after the recent jobs report painted a picture of a growing and recovering labour market, albeit at a slightly slower pace compared to June and July. 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 is a theme to keep track of for the CAD, both to the up and to the downside. These past few weeks’ rise in Oil prices saw solid support for the CAD and will remain a key short-term intermarket consideration for the oil-dependent economy and currency. A possible risk for Oil prices (and by connection the CAD) is any attempts by the US or OPEC+ to calm down the recent rise in oil prices. On the US side they could opt to release more of their reserves and on the OPEC side they could announce additional increases in production output, so watch those as risks to 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 -994 with a net non-commercial position of -27860. With the solid beat in the September jobs report, we finally saw markets trading the CAD back in line with its fundamental bullish bias, with USDCAD finally gaining enough momentum to push below key trend and psychological support levels. In the week ahead Canadian CPI will be interesting, but arguably not enough at this stage to sway the BoC’s tapering plans. Even though the positioning for the CAD does not look stretched, the CAD has outperformed its peers by a big margin in the past two weeks which could spark some mean reversion. 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.
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Today’s Notable Sentiment ShiftsUSD – The dollar fell from its one-year high on Wednesday as longer-dated Treasury yields dipped. However, the US’s CPI report showed prices rose solidly last month, while the minutes from the Federal Reserve’s September meeting confirm tapering will begin “soon”. Furthermore, Oanda notes that “the market is now seeing a major pivot here as far as how inflation is showing more signs of being persistent than transitory, and that’s likely to force the Fed’s hand to deliver a rate hike well in advance of what people were anticipating.”
TVC:DXY
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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 up 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 could mean an uphill push for GBP to see the same size of 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 at the end of last year, some issues like the Northern Ireland protocol remains, and with neither side willing to budge right now it seems like a never ending can kicking could see these issues drag on for a long time. For now, Sterling has looked through all the rigmarole and should continue to do so as long as the cans are kicked down the road. 4. CFTC Analysis Latest CFTC data showed a positioning change of -21982 with a net non-commercial position of -20018. Sterling have seen a very impressive rebound following last week’s sell off. Right now, large speculators and leveraged funds are at odds with each other, with large speculators holding a net-short and leveraged funds still sitting on the largest net-long among the majors. Markets reacted positively to new Chief Economist Pill’s comments about inflation , which yet again sparked additional downside in SONIA futures , with money markets pricing in a 10-basis point hike in the next two months and more than 70 basis points of tightening in 2022. So, even though this amount of tightening should be positive for a currency, the reasons why the markets are pricing in the 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. 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 This week we’ll finally have the September NFP print, but all the previous excitement about this event has been mitigated with the Fed’s previous meeting. The Fed’s comments that they don’t need to see a huge or stellar jobs print but that a decent print will do, has largely taken the sting out of the Sep NFP print. The current concern about inflation means that the Average Hourly Earnings release could be of more interest in market participants to see whether the current labour supply shortage sparks further acceleration in wages. 5. CFTC Analysis Latest CFTC data showed a positioning change of +5565 with a net non-commercial position of +32026. Positioning isn’t anywhere near stress levels for the USD, but with both large speculators and leveraged funds sitting in net-long territory, it does mean that the Dollar could be more sensitive from mean reversion while still elevated after the recent push higher into new YTD highs. Thus, possible reflationary data will be a key focus point for the USD in the weeks ahead.
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CAD CHF - FUNDAMENTAL DRIVERSCAD FUNDAMENTAL BIAS: BULLISH 1. The Monetary Policy outlook for the BoC At their September meeting the BoC delivered on market expectations by not providing any new information. The bank acknowledged the recent hit to growth has been bigger than expected, but also explained that they deem the hit to be temporary and still expect solid growth this year. They also reiterated that even though inflation is currently high and expected to climb, they deem current price pressures as being mostly transitory. The meeting did nothing to change the market’s expectations that the bank will go ahead to announce another round of tapering of C$1 billion at their October meeting, especially after the recent jobs report painted a picture of a growing and recovering labour market, albeit at a slightly slower pace compared to June and July. 2. Commodity-linked currency with dependency on Oil exports Oil staged a massive recovery after hitting rock bottom in 2020. The move higher over the past few 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 (vaccines and monetary and fiscal stimulus induced recoveries); rising inflation expectations. Even though further gains for Oil will arguably prove to be an uphill battle from here, the bias remains positive in the med-term as long as current supportive factors and drivers remains intact. We will of course have short-term ebbs and flows as we’ve seen in recent weeks which could affect the CAD from an intermarket point of view, but as long as the med-term view for Oil remains higher that should be supportive for Petro-currencies like the CAD. The recent energy shortages facing large parts of the globe is a factor that has placed upside pressure in Oil , Gas and Coal prices and is a theme to keep track of for the CAD, both to the up and to the downside in the event that shortages start to ease. This past week’s rise in Oil prices saw solid support for the CAD and will remain a key short-term intermarket consideration for the oil-dependent economy and currency. 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 -6631 with a net non-commercial position of -26866. With the solid beat in the September jobs report, we finally saw markets trading the CAD back in line with its fundamental bullish bias, with USDCAD finally gaining enough momentum to push below key trend and psychological support levels. In the week ahead, with a very light economic data schedule coming up, the main focus and driver will fall on energy prices as well as overall risk sentiment. 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 -4092 with a net non-commercial position of -15679. The CHF positioning continued to unwind some of its recent surprising strength over the past few weeks. The CHF is back inside net-short territory as one would expect from a currency with an overall med-term bearish outlook. 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.
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1
NZD CHF - 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. The country’s 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 -2190 with a net non-commercial position of +8052. The flush lower in the NZD after the RBNZ was in line with our expectations as the bar for a hawkish surprise was quite high going into the meeting. However, after the buy-the-rumour- sell-the-fact reaction and subsequent flush lower, the NZD is back at some very attractive med-term levels, especially versus the low-yielding currencies like the JPY and the CHF, thus we like the odds of looking for med-term allocations to the upside in the NZDJPY and NZDCHF . 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 -4092 with a net non-commercial position of -15679. The CHF positioning continued to unwind some of its recent surprising strength over the past few weeks. The CHF is back inside net-short territory as one would expect from a currency with an overall med-term bearish outlook. 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.
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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. The country’s 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 -2190 with a net non-commercial position of +8052. The flush lower in the NZD after the RBNZ was in line with our expectations as the bar for a hawkish surprise was quite high going into the meeting. However, after the buy-the-rumour- sell-the-fact reaction and subsequent flush lower, the NZD is back at some very attractive med-term levels, especially versus the low-yielding currencies like the JPY and the CHF, thus we like the odds of looking for med-term allocations to the upside in the NZDJPY and NZDCHF . 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 +1066 with a net non-commercial position of -63694. 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 despite a softer US jobs report as inflation fears saw additional downside for bonds across the board. The inverse correlation to US10Y saw massive downside versus for the JPY this week ahead. 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.
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CAD JPY - FUNDAMENTAL DRIVERSCAD FUNDAMENTAL BIAS: BULLISH 1. The Monetary Policy outlook for the BoC At their September meeting the BoC delivered on market expectations by not providing any new information. The bank acknowledged the recent hit to growth has been bigger than expected, but also explained that they deem the hit to be temporary and still expect solid growth this year. They also reiterated that even though inflation is currently high and expected to climb, they deem current price pressures as being mostly transitory. The meeting did nothing to change the market’s expectations that the bank will go ahead to announce another round of tapering of C$1 billion at their October meeting, especially after the recent jobs report painted a picture of a growing and recovering labour market, albeit at a slightly slower pace compared to June and July. 2. Commodity-linked currency with dependency on Oil exports Oil staged a massive recovery after hitting rock bottom in 2020. The move higher over the past few 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 (vaccines and monetary and fiscal stimulus induced recoveries); rising inflation expectations. Even though further gains for Oil will arguably prove to be an uphill battle from here, the bias remains positive in the med-term as long as current supportive factors and drivers remains intact. We will of course have short-term ebbs and flows as we’ve seen in recent weeks which could affect the CAD from an intermarket point of view, but as long as the med-term view for Oil remains higher that should be supportive for Petro-currencies like the CAD. The recent energy shortages facing large parts of the globe is a factor that has placed upside pressure in Oil, Gas and Coal prices and is a theme to keep track of for the CAD, both to the up and to the downside in the event that shortages start to ease. This past week’s rise in Oil prices saw solid support for the CAD and will remain a key short-term intermarket consideration for the oil-dependent economy and currency. 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 -6631 with a net non-commercial position of -26866. With the solid beat in the September jobs report, we finally saw markets trading the CAD back in line with its fundamental bullish bias, with USDCAD finally gaining enough momentum to push below key trend and psychological support levels. In the week ahead, with a very light economic data schedule coming up, the main focus and driver will fall on energy prices as well as overall risk sentiment. 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 +1066 with a net non-commercial position of -63694. 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 despite a softer US jobs report as inflation fears saw additional downside for bonds across the board. The inverse correlation to US10Y saw massive downside versus for the JPY this week ahead. 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.
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NZD USD - FUNDAMENTAL DRIVERSNZD FUNDAMENTAL BIAS: BULLISH 1. The Monetary Policy outlook for the RBNZ New Zealand’s Zero Covid strategy caused quite the rigmarole for the NZD before the RBNZ’s last meeting as market participants were forced to unwind aggressive expectations for rate hikes going into the meeting. The unwind was so aggressive that OIS prices dropped from a 100% chance of a hike at that meeting to just above 50% going into it. The RBNZ surprised by leaving rates unchanged, but offered an optimistic tone compared to their prior meetings. They projected 7 hikes between Q4 2021 and H1 2023 (bringing the OCR to 2.0%). This was much more aggressive than what markets were expecting. Governor Orr later explained that they cannot wait for uncertainty to move on policy as they have a lot of work to do to get back to the neutral rate of 2.0%. When asked about Oct, the Governor said the meeting is live. Thus, with the upgraded rate path the med-term bullish outlook remains intact for the NZD. A week after their meeting we also had very hawkish comments from RBNZ’s Hawkesby who stated that the bank’s decision not to hike rates was mostly about optics and not due to risks, and also explained that the bank contemplated hiking rates by 50 basis points. This just confirmed the bank’s hawkish pivot and places them miles ahead any other major central banks. The announcement two weeks ago about the RBNZ moving forward with tightening LVR restrictions to curb speculation in the housing market was interesting from a timing point of view. Usually, these type of macroprudential policies takes pressure of the central bank to reign in speculation with higher rates. The announcement has already seen some repricing for October with markets now pricing in a 25-basis point hike instead of a 50-basis point hike for this week’s upcoming meeting on Wednesday. 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 AUD 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. The country’s 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 +2144 with a net non-commercial position of +10246. This week saw some decent unwind in net-long positions for leveraged funds (fast money) which can also explain some of the oversized downside in the NZD during the past week. With the overall optimistic rate path from the RBNZ, the bias for the currency remains unchanged, and with small net-long positioning the current spot levels for the NZD still looks attractive for med-term buyers but waiting for the RBNZ is a prudent move. 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. CFTC Analysis Latest CFTC data showed a positioning change of +1361 with a net non-commercial position of +26461. Positioning isn’t anywhere near stress levels for the USD, but with both large speculators and leveraged funds sitting in net-long territory, it does mean that the Dollar could be more sensitive from mean reversion while still elevated after the recent push higher into new YTD highs. 5. Economic Data This week we’ll finally have the September NFP print, but all the previous excitement about this event has been mitigated with the Fed’s previous meeting. The Fed’s comments that they don’t need to see a huge or stellar jobs print but that a decent print will do, has largely taken the sting out of the Sep NFP print. The current concerns about inflation means that the Average Hourly Earnings release could be of more interest for market participants to see whether the current labour supply shortage sparks further acceleration in wages.
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EUR USD - FUNDAMENTAL DRIVERSEUR FUNDAMENTAL BIAS: WEAK BEARISH 1. The Monetary Policy outlook for the ECB The ECB provided an overall balanced policy decision at their September meeting. They chose to slow the pace of asset purchases, explaining that the current levels of financing conditions allow them to buy assets under the PEPP at a ‘moderately’ slower pace compared to the pace of purchases seen in Q2 and Q3. However, as expected, the bank made it very clear that the move was not tapering it was merely a recalibration of purchases (when you plan to perform less QE that’s technically tapering but who’s counting). The bank raised their inflation projections for 2021, 2022 and 2023, and even though the 2021 projections were arguably not as high as markets were hoping for, the more important medterm projections still showed inflation moving to well below the bank’s 2% target to affirm the transitory view of recent price pressures. All in all, the decision was broadly balanced and as a result failed to inspire any meaningful reaction in European assets. For now, market’s attention turns back to the incoming data to pave the way for clarity on the PEPP and API (and a possible transition). 2. The country’s economic developments Earlier issues with vaccinations and lockdowns at the start of 2021 weighed on EU growth prospects, with growth differentials against the US and UK still quite wide, despite some of the recent strong economic data. Fiscal support in the US and UK have given their economies a firm advantage over the EU. However, recent activity data suggests the hit to the economy from recent lockdowns weren’t as bad as feared and some data has surprised higher. That alone though is not enough to change the current bias. Another factor we are keeping track of is the discussions among European states to allow the purchase of green bonds not to count against the budget deficits of EU countries. If such a decision were to be approved, it could change the fiscal picture and would expect to be a positive for the EUR and European equities. 3. Funding Characteristics An interesting driver that we’ve been watching for the EUR for the past couple of months is the often-interesting funding characteristic exhibited by the EUR during periods of risk off sentiment. As a low yielder (just like the JPY and CHF), the EUR has been an interesting choice among carry trades, especially during 2019 the EUR was a favourite funding currency against the high yielding EM currencies, and part of the massive one-way upside in the EUR during the initial risk-off scare in March 2020 was attributed to large carry trades being unwound. Earlier this week we saw the EUR exhibiting lots of resilience despite USD strength, and as more and more central banks start to move towards higher rates, the use of the EUR as a funding currency should keep it pressured in the med-term vs higher yielders but could spark risk off upside if some of those trades unwind. It doesn’t mean the EUR is suddenly a safe haven, but as rates climb globally it can become more sensitive to risk. 4. CFTC Analysis Latest CFTC data showed a positioning change of -11223 with a net non-commercial position of +872. The last time large speculators were this close to neutral positioning was in March 2020. The most important positioning aspect right now though is that leveraged funds are knee-deep in EUR shorts. Thus, even though fundamentals point lower for the EUR, we would not be chasing it lower from here at the moment. 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. CFTC Analysis Latest CFTC data showed a positioning change of +1361 with a net non-commercial position of +26461. Positioning isn’t anywhere near stress levels for the USD, but with both large speculators and leveraged funds sitting in net-long territory, it does mean that the Dollar could be more sensitive from mean reversion while still elevated after the recent push higher into new YTD highs. 5. Economic Data This week we’ll finally have the September NFP print, but all the previous excitement about this event has been mitigated with the Fed’s previous meeting. The Fed’s comments that they don’t need to see a huge or stellar jobs print but that a decent print will do, has largely taken the sting out of the Sep NFP print. The current concerns about inflation means that the Average Hourly Earnings release could be of more interest for market participants to see whether the current labour supply shortage sparks further acceleration in wages.
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CAD JPY - FUNDAMENTAL DRIVERSCAD FUNDAMENTAL BIAS: BULLISH 1. The Monetary Policy outlook for the BoC At their September meeting the BoC delivered on market expectations by not providing any new information. The bank acknowledged the recent hit to growth has been bigger than expected, but also explained that they deem the hit to be temporary and still expect solid growth this year. They also reiterated that even though inflation is currently high and expected to climb, they deem current price pressures as being mostly transitory. The meeting did nothing to change the market’s expectations that the bank will go ahead to announce another round of tapering of C$1 billion at their October meeting, especially after the recent jobs report painted a picture of a growing and recovering labour market, albeit at a slightly slower pace compared to June and July. 2. Commodity-linked currency with dependency on Oil exports Oil staged a massive recovery after hitting rock bottom in 2020. The move higher over the past few 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 (vaccines and monetary and fiscal stimulus induced recoveries); rising inflation expectations. Even though further gains for Oil will arguably prove to be an uphill battle from here, the bias remains positive in the med-term as long as current supportive factors and drivers remains intact. We will of course have short-term ebbs and flows as we’ve seen in recent weeks which could affect the CAD from an intermarket point of view, but as long as the med-term view for Oil remains higher that should be supportive for Petro-currencies like the CAD. The recent energy shortages facing large parts of the globe is a factor that has placed upside pressure in Oil, Gas and Coal prices and is a theme to keep track of for the CAD, both to the up and to the downside in the event that shortages start to ease. Keep in mind that there were sources out this week which stated that OPEC+ is contemplating bringing more supply back online at this week’s upcoming meeting, so that will be a key risk driver to watch for the Petro-currencies 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 AUD 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 +7642 with a net non-commercial position of -20235. Even though market expectations for Oct tapering is intact, markets remain reluctant to trade the CAD back in line with its fundamental bias. The USDCAD for example has seen some decent one-side swings over the past few weeks but compared to July prices we are close to flat. Even though the bias for CAD remains unchanged, the reluctance from the market means we are happy to stay a bit more patient with the currency right now. 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. 4. CFTC Analysi Latest CFTC data showed a positioning change of -8689 with a net non-commercial position of -64760. 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 climbing 20 basis points (that’s a lot for the bond market by the way) in a very short space of time. The inverse correlation to US10Y saw massive downside versus the USD at the start of the week, and then as yields cooled off and risk sentiment started to sour towards the end of the week, we saw some mild reprieve coming back for the JPY. For now, the bias remains firmly titled to the downside in the med-term, but as always, any major risk off flows can support the JPY, especially with quite a sizable net-short position still built up in the currency. It’s not only large speculators but also leveraged funds that are net-short the JPY, so expect any major risk off flows to favour the JPY, unless that risk off flow is driven by strong moves higher in US10Y of course so just keep that in mind.
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AUD USD - FUNDAMENTAL DRIVERSAUD FUNDAMENTAL BIAS: NEUTRAL 1. The country’s economic and health developments There are 3 key drivers we are watching for Australia’s med-term outlook: The virus situation – a Q3 GDP contraction is priced in so the question now is whether restrictions can be lifted in time to see a Q4 rebound. China – as Australia’s biggest export destination the current economic slowdown in China is important for the AUD, and markets are watching to see whether the government and PBoC steps up with expected stimulus for the economy, as well as the country’s real estate woes with the likes of Evergrande. Politics is also on the radar as the recent defence pact between the US, UK and Australia could see retaliation from China against Australian goods. Iron Ore is Australia’s biggest export (24%), and the over 50% drop from YTD highs is a negatively driver on Australia’s terms of trade. However, the recent >40% climb in Coal prices (18% of exports) from the end of July should be able to offset the drag from Iron Ore. Even though China’s drive for a greener future weighed on Iron Ore, its currency energy crunch has been a key driver of higher Coal prices. 2. The Monetary Policy outlook for the RBA At their previous meeting the RBA were hawkish in deed but not in word, by going ahead with their planned A$1 billion Sep tapering plans, but their statement and tone were overall dovish. They explained that even though they expect the economy to bounce back from covid, they are far less certain about the timing and pace of the bounce. They also moved their next assessment of the QE program to at least February, which means they essential both increased and extended their total QE package. It was a mixed bag for markets and meant the med-term bias remained neutral. Gov Lowe also surprised two weeks ago by strongly pushing back against market pricing for a late 2022 or early 2023 hike, explaining he doesn’t understand such pricing as rates is only seen rising in 2024. This, alongside developments in China arguably places the AUD on the verge of turning weak bearish from the current neutral outlook, but with the country’s vaccine drive picking up steam we could be looking at a possible recovery play for the AUD once the economy opens, so patient on the bias for now. 3. Developments surrounding the global risk outlook. As a high-beta currency, the AUD 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 AUD 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 AUD 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 -799 with a net non-commercial position of -86383. Keep in mind this data is updated until Tuesday 28 Sep, which means the push higher in the AUD from Wednesday won’t be reflected and means next week’s data is expected to see some unwind in net-shorts. However, at the current positioning levels for both large speculators and leveraged funds, the odds of seeing short squeezes higher is still on the card and risk to reward for chasing the AUD lower from here is not very attractive. 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. CFTC Analysis Latest CFTC data showed a positioning change of +1361 with a net non-commercial position of +26461. Positioning isn’t anywhere near stress levels for the USD, but with both large speculators and leveraged funds sitting in net-long territory, it does mean that the Dollar could be more sensitive from mean reversion while still elevated after the recent push higher into new YTD highs. 5. Economic Data This week we’ll finally have the September NFP print, but all the previous excitement about this event has been mitigated with the Fed’s previous meeting. The Fed’s comments that they don’t need to see a huge or stellar jobs print but that a decent print will do, has largely taken the sting out of the Sep NFP print. The current concerns about inflation means that the Average Hourly Earnings release could be of more interest for market participants to see whether the current labour supply shortage sparks further acceleration in wages.
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DXY Marches Towards 93 As Strong Fundamentals Back the GreenbackThe USD Index continues its advance this Thursday as it ascends towards 4-month highs. Boosting the index are the following factors: a) Two central bankers are bullish about the US economy’s growth trajectory. b) The lowest initial jobless claims figures in the pandemic era. c) Generalized risk aversion in the markets and flight to the safe-haven USD. Two central banks have offered their outlook on the US economy. Richmond Reserve Bank President Thomas Barkin was quoted by Reuters on Thursday as saying that the Fed could see “substantial further progress” in jobs and inflation goals, with “strong demand mean inflation.” Vice-Chairman of the Fed Richard Clarisa also said that the expected inflation pathway was “consistent” with the apex bank’s new framework and that inflation could hit 2% in 2022 or 2023. The USD Index also found joy from a drop below 700K for initial jobless claims. The actual figure of 684K was much less than last week’s figure of 781K, which was an upward revision. Europe’s coronavirus situation also spooked the markets in the London session, leading to safe-haven plays that have boosted the greenback despite a drop in 10-year bond yields. The DXY is up 0.33% on the day.
TVC:DXY
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12-Month GBP/AUD Forecast: 1.72 Says Westpac AnalystForeign exchange analysts at Westpac expects that near-term yield trends will support the Pound-to-Australian Dollar (GBP/AUD) exchange rate, especially with a less dovish tone from the Bank of England (BoE). Overall global trends, however, will see a reversal later in the year, especially with the Australian trade surplus. “The Aussie stands to gain more from a synchronised global rebound over 2021 than the pound does, especially with Asia likely to keep outperforming. Near term GBP/AUD could rally a bit further, towards 1.8200, but our baseline forecasts are lower over the year, to 1.7500 then 1.7200.” GBP/AUD has not traded as low as 1.72 since January 2018. BoE stance underpins the Pound Sterling GBP/AUD has posted net gains in 2021 with less dovish rhetoric from the Bank of England one important element. Westpac notes; “BoE official rhetoric has been mixed but overall less dovish than the RBA’s.” In this context, 2-year yield spreads have moved into the Pound Sterling’s favour Looking at Reserve Bank policy, Westpac expects smaller QE packages in late 2021 and in 2022 as the labour market still has plenty of slack. Westpac also notes optimism over the UK outlook. “The UK has vaccinated a larger proportion of its population than most major economies, which should reinforce the BoE’s optimism over economic recovery later in 2021.” Trade surplus supports the Australian Dollar There has been a sharp turnaround in the Australian trade position. The latest data recorded a surplus of A$8.1bn for February from A$8.2bn the previous month and has been consistently in surplus during the past year. There has also been a sharp turnaround in the current account with an A$14.5bn for the fourth quarter of 2020 from A$10.7bn previously. Westpac also expects that the Australian economy will continue to draw support from further strength in the Asian economy which will feed through into the trade account. Westpac notes; “In isolation, yield spreads still suggest downside risk for AUD. But Australia’s historically rare current account surpluses provide solid insulation.” Both currencies will tend to be vulnerable if there is a sustained deterioration in risk appetite. In contrast, there will be scope for net gains if global equity markets post further strong gains.
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S&P500 at 4,100 as a 'base case' this year - RBCRBC discussed its S&P500 expectations for 2021 in a recent note to clients. RBC noted: Our 2021 S&P 500 target of 4.100 is our base case. It is roughly the median of 15 upside scenarios that we examined. If our call proves too conservative, our analysis suggests that the S&P 500 could trade as high as 4,600 for a +20% full year gain - the most bullish scenarios we examined came close to this level. Among the eight downside scenarios we examined, which articulate our bear case for full year or interim downside if momentum breaks lower, several point to a pullback to the 3600 / 3700 area (mid single digit drop in percentage terms depending on the starting point used) or to -3,200 (mid to high teens dip in percentage terms depending on starting point).
OANDA:SPX500USD
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GBP/USD to slide in the coming months - Credit AgricoleCredit Agricole CIB Research discusses GBP/USD outlook and targets the pair at 1.35 over the coming 3-months. "Growing UK vaccine rollout and escalating post-Brexit tensions with the EU to cloud the UK economic outlook even after lockdown conditions are lifted in Q2. The US economy to boom in Q2. The GBP/USD rally contributed to the more aggressive tightening of the UK financial conditions relative to the US. This could make the BoE more dovish than the Fed". "Our analysis suggests that overvalued GBP/USD could be one of the best G10 FX hedges against the twin risks of elevated UST yields and risk aversion in Q2".
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EURUSD – 1.16 by end of Q2 & 1.14 by year-end – BarclaysBarclays discussed its outlook for USD in a recent note to clients, maintaining a bullish bias and targeting EURUSD at 1.16 by the end of Q2 and 1.14 by year-end. Barclays explains: The USD remains king of the beasts… The dollar offers the best of both worlds: G10-leading growth that bests all but a handful of EM, and a recent track record as the best-performing safe haven. On its eponymous smile, it seems to simultaneous reside at both ends at once, like Schrodingers cat in two simultaneous states, as markets bounce between radical post-COVID uncertainty and ebullience on surging US data. Amid a bond market selloff that challenges the relative safety of duration, this gives the USD an attraction in global portfolios that is unmatched as a hedge on equity risk. Yet, after years of appreciation, the USD remains overvalued, although down from last year’s risk-driven surge. Hence, we expect the dollar’s Schrodinger’s cat grin to keep it buoyant at elevated levels, but not lead to significant appreciation.
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AUD: Current Sentiment DriversLatest Developments: March 18 – Employment for February saw the Unemployment Rate fall to 5.8% from January’s 6.4%, while Employment Change printed at 88.7K compared to a prior of 29.1K. March 3 – Real GDP for Q4 printed at 3.1% Q/Q and -1.1% Y/Y versus consensus of 2.5% Q/Q and -1.8% Y/Y. Reports suggest the V-shaped recovery taking place in Australia is likely to continue as strong consumer spending and its housing boom point to a strong start in 2021. March 2 – At their March meeting, the RBA kept the Cash Rate and 3yr yield target at 0.10% and asset purchases at A$100 billion as expected. Additionally, the RBA reaffirmed its commitment to highly supportive monetary conditions, adding it does not expect a tight labour market and high wage growth until 2024 at the earliest. January 27 - Headline CPI for Q4 printed at 0.9% Q/Q and 0.9% Y/Y compared to Q3’s 1.6% and 0.7%, respectively. Regarding Australia’s core measures, Weighted Median CPI printed at 0.5% Q/Q and 1.4% Y/Y, while Trimmed Mean CPI printed at 0.4% Q/Q and 1.2% Y/Y. Future Sentiment Shifts: Markets have stabilised over recent months with AUD one of the primary beneficiaries of the material improvement in the risk outlook since the coronavirus outbreak caused panic last year. Risks to the market’s overall risk outlook remain high, as many countries are experiencing second waves of the coronavirus and implementing new lockdowns. However, with that said, with coronavirus vaccines now being rolled out, the future outlook is optimistic. We expect the market's overall risk tone and performance in commodities to remain the dominant driver and influence for AUD going forward. Of course, pay close attention to global progress in containing and managing the coronavirus outbreak took. Primary Drivers: Reserve Bank of Australia – Australia’s monetary policy outlook plays a pivotal role in AUD’s fundamental outlook. A hawkish stance from the RBA and expectations for policy tightening will likely prove AUD positive; while a dovish stance and expectations for policy easing will likely prove AUD negative. Risk tone – Due to its high beta status, AUD is strongly correlated with the overall risk tone; strengthening in risk on environments and weakening in risk off environments. Commodity Markets – Due to Australia’s dependence in its commodity exports for economic growth, AUD is strongly correlated with commodity markets, particularly iron ore, which accounts for 20% of all Australian exports. China – China is Australia’s largest trading partner, accounting for 35% of all Australian exports and 24% of Australia’s imports. As such, developments in China and Chinese economic data can prove highly influential to AUD.
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EUR: Current Sentiment DriversLatest Developments: March 22 – Spain’s coronavirus cases increased to 3,228,803 (+4,420) while Italian cases increased to 3,400,851 (+13,820) and French cases increased to 4,298,395 (+15,792). March 17 – Final HICP for February remained unchanged from January at 0.9% Y/Y; although, Core HICP was confirmed at 1.1%, compared to January’s 1.4%. March 11 – At their March meeting, the ECB kept all three key rated unchanged as expected, and although the size of PEPP and APP remain unchanged, the ECB stated that purchases under PEPP in the next quarter are to be conducted at a significantly higher pace. March 9 – Revised GDP for Q4 printed at -0.7% Q/Q and -4.9% Y/Y compared to -0.6% Q/Q and -5.0% Y/Y for the flash estimates. February 1 – Europe’s Unemployment Rate for December remained unchanged at 8.3%. Future Sentiments Shifts: EUR’s outlook remains highly dependant on the coronavirus outbreak and Europe’s economic outlook. Concerns over Europe’s coronavirus outlook have risen since late last year, with many countries now suffering second waves and re implementing lockdowns. Although countries appear better equipped compared to their initial outbreaks, Europe’s coronavirus outlook poses significant downside risks to their economies. Additionally, although the EU is rolling out a vaccine programme, it has faced several obstacles and widespread criticism. All in all, while coronavirus concerns remain high in Europe, risks for EUR will be to the downside, especially when compared to the currencies of countries that are managing their outbreaks and vaccine rollouts more effectively. Primary Drivers: European Central Bank – Europe’s monetary policy outlook remains key to EUR’s fundamental outlook. EUR is likely to be supported when the ECB holds a hawkish stance and begin tightening policy, but come under pressure when the central bank holds a dovish stance and is expected to ease policy. Month End Flows – During the last few trading days of every month, EUR is usually influenced by month end flows as banks and institutions rebalance their books and settle transactions. Although not always the case, more often than not, month end flows tend to be EUR positive especially against GBP. USD –EURUSD is the most traded currency pair in the world, making up 24% of daily forex trades according to the Bank of International Settlements (BIS). As such, movements in USD often influence EUR, with EUR weakening when USD strengthens and EUR strengthening when USD weakens.
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GBP: Current Sentiment DriversLatest Developments: March 22 – The UK’s coronavirus count increased to 4,301,925 cases (+5,342). March 18 – At their March meeting, the BoE kept its official Bank Rate unchanged at 0.10% and its QE programme at £895 billion. The BoE added that they do not intend to tighten policy until there is clear evidence that there is significant progress towards eliminating spare capacity and achieving its 2% inflation goal. February 23 – The Unemployment Rate for December increased to 5.1% from a prior of 5.0%. Employment Change printed at -114K while Average Earnings printed at 4.7% 3M Y/Y. For January, Claimant Count Change printed at -20.0K. February 17 – CPI for January increased to 0.7% Y/Y (prior 0.6%) and printed at -0.2% M/M (prior 0.3%). Core CPI remained at 1.4% Y/Y and printed at -0.5% M/M (prior 0.3%). November 12 – Preliminary Q3 GDP printed at 15.5% Q/Q and -9.6% Y/Y versus expectations for 15.8% and -9.4% respectively. Future Sentiment Shifts: There are several risks to GBP’s outlook, particularly with respect to the UK’s coronavirus/lockdown outlook and interest rate expectations. Of these two, expect the UK’s coronavirus outlook to play the more influential role in the short term as the UK’s coronavirus vaccine rollout continues to show signs of stabilizing its breakout, which in turn, should allow the UK to ease lockdown restrictions in the months ahead. However, in the medium term, as the market’s focus shifts, monetary policy should dominate. Regarding monetary policy, risks still remain; although, further easing appears unlikely at this point and markets looking for a hike in 2022. Primary Drivers: Bank of England – Monetary Policy in the UK remains highly influential to GBP’s fundamental outlook. Expectations for policy tightening should prove GBP positive, while expectations for policy easing should prove GBP negative. Brexit – The outlook for the UK’s exit from the EU in December remains a key influence for GBP as it poses significant risks to the UK’s economic outlook. With the UK set to leave at the end of the year and progress in negotiations between the UK and the EUR significantly hampered by the coronavirus outbreak, risks remain firmly tilted to the downside with a hard Brexit or even no deal Brexit remaining distinct possibilities.
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JPY: Current Sentiment DriversLatest developments: March 19 – BoJ kept its policy rate unchanged at 0.10% and the 10 year yield target unchanged at 0%. However, the central bank did raise the target band for yields, allowing them to fluctuate by +/-25bps from target. March 18 – National CPI for February printed at -0.4% Y/Y for both the headline and core measure, compared to -0.6% for both measures in January. February 14 – Preliminary GDP for Q4 printed at 3.0% Q/Q and 127% Q/Q Annualised, compared to 5.3% and 22.9% prior, respectively. Future Sentiment Shifts: JPY notably strengthened throughout the coronavirus pandemic as markets remained firmly risk off to the benefit of safe havens. Although market sell offs have long since subsided, significant risks still remain as many notable countries continue to fight second waves. The coronavirus global economic outlook will remain heavily influential to JPY, with the currency likely to once again see a renewed bid from the rising number of second waves and their implications for the global economy. Primary Drivers: Risk Tone – With a consistently positive current account and incredibly low interest rates in Japan, JPY has become synonymous with the term safe haven. As the world’s leading creditor nation, times of uncertainty results in repatriation flows, supporting JPY. At the same time, as investors often use JPY as a funding currency due to Japan’s low interest rates, investors are often forced to buy JPY to close their risky positions when market’s shift to risk off, further supporting the currency.
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NZD: Current sentiment driversLatest developments: March 17 – GDP for Q4 printed at -1.0% Q/Q and -0.9% Y/Y. Commenting on the contraction in economic activity, Capital Economics stated “The modest solid decline in activity in Q4 reflects the fading of pent up demand and means that in New Zealand a second recession is imminent as GDP is bound to decline in Q1.” February 24 – The RBNZ left its OCR unchanged at a record low of 0.25% and asset purchases at NZ$100 billion as expected. The central bank kept future rate cuts on the table but added that the domestic economy’s resilience implies no significant additional stimulus is currently required. November 3 – For Q4, the Unemployment Rate in New Zealand printed below consensus at 4.9% from 5.3% in Q3. Additionally, Employment Change printed at 0.6% versus market consensus of 0.0%. January 21 – Inflation for Q4 saw CPI Y/Y remain unchanged at 1.4% while CPI Q/Q printed at 0.5% from a prior of 0.7% Future sentiment shifts: Due to its high beta status, NZD’s performance over recent months has been strongly correlated with the market’s overall risk tone, with the currency weakening substantially as markets sold off and strengthening as the risk tone recovered and turned positive. Recent global data has been encouraging, continuing to support NZD and the overall risk tone; although, the ongoing spread of the virus throughout the world and second waves in many countries still pose significant risks. For a fundamental improvement in NZD’s outlook and bias, there will need to be an easing of concerns surrounding the spread of the coronavirus (which appears likely given the vaccine rollout). However, even then, NZD upside could become an uphill battle with many analysts arguing the currency is approaching overvalued levels. Primary drivers: Reserve Bank of New Zealand – New Zealand’s monetary policy outlook plays a key role in NZD’s fundamental outlook. A hawkish stance from the RBNZ and expectations for policy tightening will support NZD; while a dovish stance and expectations for policy easing will pressure NZD. Risk Tone – Due to its high beta status, NZD is strongly correlated with the overall risk tone; strengthening in risk on environments and weakening in risk off environments. Commodity Markets – NZD is indirectly correlated with commodity markets due to New Zealand’s dependence on China and Australia for trade. As both Australia’s and China’s economies influence and are influenced by the commodities complex, NZD tends to move in accordance with the commodities markets, but also with AUD.
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USD: Current sentiment driversLatest developments: March 22 - US coronavirus cases increased to 30,577,098 (+45,884) with cases in California increasing by 2,990, cases in Texas increasing by 2,886 and cases in Florida increasing by 2,862. March 17 – At their March meeting, the FOMC left the FED Funds Rate (FFR) unchanged and asset purchases at a total of $120 billion per month. The updated economic projections continue to show the central bank does not expect to raise rates through all of 2023 based on its median dot plot; although, four members now see a hike in 2022 and seven see a hike in 2023. March 10 – US CPI for February printed at 0.4% M/M and 1.7% Y/Y, compared to January’s 0.3% M/M and 1.4% Y/Y. Core CPI printed at 0.1% M/M and 1.3% Y/Y versus 0.0% and 1.4% prior. March 5 – US employment for February saw the Unemployment Rate fall to 6.2% from a prior of 6.3%, while Non-Farm Payrolls printed at 379K for the month. February 25 – Preliminary GDP for Q4 printed at 4.1% compared to the advanced estimate of 4.0%. The BEA noted: “The increase in real GDP reflected increases in exports, nonresidential fixed investment, PCE, residential fixed investment, and private inventory investment that were partly offset by decreases in state and local government spending and federal government spending”. Future sentiment shifts: Unprecedented easing from the FED in 2020 and expectations for prolonged easy policy following the Fed’s adoption of AIT are arguably the most bearish factors for USD at present. However, in the short term, rising US yields and expectations for a strong fiscal response have been and will likely remain supportive for the world’s reserve currency. Additionally, progress regarding the coronavirus in the US will also remain key; but with the country now rolling out vaccines, the long run economic outlook is becoming increasingly optimistic. Primary drivers: Federal Reserve – The US’ monetary policy outlook remains highly influential to USD’s fundamental outlook. Policy easing from the FOMC is already at unprecedented levels, and expectations regarding the duration and extent of their emergency measures will continue to influence USD’s fundamental outlook. Further and more aggressive easing from the Fed will likely weigh on USD, while expectations for eventual tapering and policy normalization will likely prove supportive. Risk Tone – As the world’s reserve currency, USD is the most liquid currency in the world, and consequently, the ultimate safe haven. Although USD does not always exhibit safe haven properties, when markets begin to panic and participants dump almost all other assets to rush into cash, USD becomes the safe haven of choice.
TVC:DXY
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CAD – Scope for further correction against USD – Credit AgricoleCredit Agricole discussed its outlook for CAD in a recent note to clients, seeing scope for further correction against USD. Credit Agricole explains: Even though sentiment may remain in favour of buying the CAD against lower yields such as the EUR, CHF and JPY, positioning as it stands still argues for some caution. Even though the CAD is not yet trading in strongly overbought territory, corrective downside risk should be treated as high. Having said that, we remain of the view that the currency should not be chased higher with underperformance against most of its commodity bloc peers likely to remain intact too.
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