CAD
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 [1] supply & demand (OPEC’s production cuts); [2] 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); [3] 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.
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 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 -18594 with a net non-commercial position of -27877. Quite a big change, and no doubt driven by the risk off jitters we saw in risk assets, but the CAD clearly carried the brunt compared to the AUD & NZD. 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 has seen some decently largely one-side swings but compared to July prices we are close to flat. Even though the bias remains unchanged, the reluctance from the market means we are happy to stay a bit more patient with the CAD 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.
3. CFTC Analysis
Latest CFTC data showed a positioning change of +4224 with a net non-commercial position of -56071. With positioning still well inside netshort territory we want to be careful of the risks going in September which is historically the worse performing month for equities. That alone doesn’t mean we are expecting equities to push lower but given the frothy price action over recent weeks, as well as seasonality , as well as the growing chorus of participants calling for a bigger correction, as well as the Evergrande debacle, we don’t want to ignore the possibility of some increased volatility . That doesn’t mean we start buying the JPY of course, it just means that if we do see some jitters creeping in for risk assets it is expected to be positive for the JPY, and with a big net-short there is a lot of downside in the JPY that can be unwound in such a scenario.
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 [1] supply & demand (OPEC’s production cuts); [2] 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); [3] 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.
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 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 -18594 with a net non-commercial position of -27877. Quite a big change, and no doubt driven by the risk off jitters we saw in risk assets, but the CAD clearly carried the brunt compared to the AUD & NZD. 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 has seen some decently largely one-side swings but compared to July prices we are close to flat. Even though the bias remains unchanged, the reluctance from the market means we are happy to stay a bit more patient with the CAD 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.
3. CFTC Analysis
Latest CFTC data showed a positioning change of +4224 with a net non-commercial position of -56071. With positioning still well inside netshort territory we want to be careful of the risks going in September which is historically the worse performing month for equities. That alone doesn’t mean we are expecting equities to push lower but given the frothy price action over recent weeks, as well as seasonality , as well as the growing chorus of participants calling for a bigger correction, as well as the Evergrande debacle, we don’t want to ignore the possibility of some increased volatility . That doesn’t mean we start buying the JPY of course, it just means that if we do see some jitters creeping in for risk assets it is expected to be positive for the JPY, and with a big net-short there is a lot of downside in the JPY that can be unwound in such a scenario.
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.