CAD
FUNDAMENTAL BIAS: BULLISH
1. The Monetary Policy outlook for the BoC
At the July meeting the BoC confirmed market’s speculation that they will continue to scale back asset purchases by tapering QE with another C$1bln reduction per week. Even though the bank’s language and overall tone was in line with overall consensus, the reaction in the CAD suggests that some participants might have been expecting more from the bank in terms of a hawkish tilt. The bank also reiterated that there is particular uncertainty in their projections and stressed that the economic recovery requires extraordinary policy accommodation, which arguably is something the bulls wanted to see removed in the statement.
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 (1) supply & demand (OPEC’s production cuts); (2) improving global economic outlook and improving oil demand outlook (vaccines and monetary and fiscal stimulus induced recoveries); (3) rising inflation expectations (reflation). Even though further gains for Oil will arguably prove to be an uphill battle, the bias remains positive in the med-term as long as the 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.
3. Developments surrounding the global risk outlook.
As a high-beta currency, CAD has benefited from the market's improving risk outlook over recent months as participants moved out of safe- havens and into riskier, higher-yielding assets. As a pro-cyclical currency, the CAD enjoyed upside alongside other cyclical assets going into what majority of market participants think was an early post-recession recovery phase. As long as expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the CAD in the med-term. It seems that a lot of the concerns about positioning in the CAD has abated after the currency’s push lower and have seen participants being willing to trade the CAD back in line with its fundamental bullish outlook.
4. CFTC Analysis
The CAD only saw some marginal positioning changes (-995) with the latest CFTC data updated until Tuesday 10 August. The CAD’s positioning has seen a substantial unwind in the past few weeks after the CAD got a bit frothy after the April BoC policy meeting where the bank took a substantial hawkish tilt. However, in the past few weeks a lot of the froth has been washed out and with the bias for the CAD still bullish in the med-term, the current positioning means we could see med-term buyers stepping back in gradually.
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 dependent on the type of market environment from a risk and cycle point of view. In the past week we saw a perfect environment for downside in the JPY versus the USD after the solid ISM Services, NFP and Fed comments from the week before and provided a good opportunity to trade the USDJPY higher going into the CPI print. However, we took profit when Core CPI MM came in slightly softer. After the print the Dollar softened (also driven by strong pre-positioning), and the move was exacerbated on Friday when yields saw some chunky downside as well. The med-term outlook remains down for the JPY, but it’ll be important for us to see whether yields can keep up its upside momentum and of course we’ll need to keep an eye on overall risk sentiment as well, especially heading deeper into August and its typical summertime volatility.
3. CFTC Analysis
The JPY remains the biggest net short among the majors with yet another sizable increase in net-shorts (-5467) with the latest CFTC data updated until Tuesday 10 August. The JPY has failed to take much advantage of the wash out in treasury positions and a drop to 1.12% in US10Y over the past few weeks. The flush lower in both US10Y and the USD on Friday saw some mild reprieve for the JPY as USDJPY rotated back towards key levels of technical support after a solid run higher at the start of the week. The bias for the JPY remains driven by the overall risk sentiment and movements in US10Y, which means seeing how the market decides to trade after Friday’s surprisingly big drop in US consumer sentiment will be important for the JPY as any big risk off flows should provide support for the currency in the short-term, while a recovery in yields and overall sentiment should put pressure on the safe-haven.
FUNDAMENTAL BIAS: BULLISH
1. The Monetary Policy outlook for the BoC
At the July meeting the BoC confirmed market’s speculation that they will continue to scale back asset purchases by tapering QE with another C$1bln reduction per week. Even though the bank’s language and overall tone was in line with overall consensus, the reaction in the CAD suggests that some participants might have been expecting more from the bank in terms of a hawkish tilt. The bank also reiterated that there is particular uncertainty in their projections and stressed that the economic recovery requires extraordinary policy accommodation, which arguably is something the bulls wanted to see removed in the statement.
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 (1) supply & demand (OPEC’s production cuts); (2) improving global economic outlook and improving oil demand outlook (vaccines and monetary and fiscal stimulus induced recoveries); (3) rising inflation expectations (reflation). Even though further gains for Oil will arguably prove to be an uphill battle, the bias remains positive in the med-term as long as the 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.
3. Developments surrounding the global risk outlook.
As a high-beta currency, CAD has benefited from the market's improving risk outlook over recent months as participants moved out of safe- havens and into riskier, higher-yielding assets. As a pro-cyclical currency, the CAD enjoyed upside alongside other cyclical assets going into what majority of market participants think was an early post-recession recovery phase. As long as expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the CAD in the med-term. It seems that a lot of the concerns about positioning in the CAD has abated after the currency’s push lower and have seen participants being willing to trade the CAD back in line with its fundamental bullish outlook.
4. CFTC Analysis
The CAD only saw some marginal positioning changes (-995) with the latest CFTC data updated until Tuesday 10 August. The CAD’s positioning has seen a substantial unwind in the past few weeks after the CAD got a bit frothy after the April BoC policy meeting where the bank took a substantial hawkish tilt. However, in the past few weeks a lot of the froth has been washed out and with the bias for the CAD still bullish in the med-term, the current positioning means we could see med-term buyers stepping back in gradually.
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 dependent on the type of market environment from a risk and cycle point of view. In the past week we saw a perfect environment for downside in the JPY versus the USD after the solid ISM Services, NFP and Fed comments from the week before and provided a good opportunity to trade the USDJPY higher going into the CPI print. However, we took profit when Core CPI MM came in slightly softer. After the print the Dollar softened (also driven by strong pre-positioning), and the move was exacerbated on Friday when yields saw some chunky downside as well. The med-term outlook remains down for the JPY, but it’ll be important for us to see whether yields can keep up its upside momentum and of course we’ll need to keep an eye on overall risk sentiment as well, especially heading deeper into August and its typical summertime volatility.
3. CFTC Analysis
The JPY remains the biggest net short among the majors with yet another sizable increase in net-shorts (-5467) with the latest CFTC data updated until Tuesday 10 August. The JPY has failed to take much advantage of the wash out in treasury positions and a drop to 1.12% in US10Y over the past few weeks. The flush lower in both US10Y and the USD on Friday saw some mild reprieve for the JPY as USDJPY rotated back towards key levels of technical support after a solid run higher at the start of the week. The bias for the JPY remains driven by the overall risk sentiment and movements in US10Y, which means seeing how the market decides to trade after Friday’s surprisingly big drop in US consumer sentiment will be important for the JPY as any big risk off flows should provide support for the currency in the short-term, while a recovery in yields and overall sentiment should put pressure on the safe-haven.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.