EUR
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
The ECB used the April meeting as a place holder meeting for the most part by not announcing any additional policy tweaks. The plans to phase out the APP into Q3 remained intact by reducing purchases from 40bln to 30bln in May and then down to 20bln in June. Markets were leaning towards a slightly more hawkish take from the bank (given recent inflation pressures), but the lack of conviction to remove the conditionality regarding the APP removal was seen as dovish. President Lagarde added to this dovish tone by explaining that Q3 has three months and IF the bank stops the APP, it could happen July, August or September. This was an important statement as the difference between a July and September end could mean the difference between a Q3 or
Q4 rate hike. The president also added to the dovish tone by stressing that risks for the economic outlook are tilted to the downside and have recently intensified with geopolitical and virus-related challenges. When asked about policy normalization, the president made a strange comment by saying it is premature to think about monpol normalisation. As the bank is currently embarking on normalization this comment seemed out of place and reaffirmed the overall dovish take from the meeting. There were the usual sources releases after the presser which said policymakers see a July hike as still possible after Thursday's meeting, which provided some reprieve. With inflation >7% and growth slowing, the June meeting which accompanies staff economic projections will be critical for markets to solidify whether expectations of 1 or 2 hikes this year is correct or not.
2. Economic & Health Developments
Growth differentials still favour the US over EU capital flows, but differentials have turned positive against the UK. Given growing stagflation fears the ECB is in a tough spot, being forced to normalize policy to try and combat inflation but could as a result damage growth. Ongoing EU fiscal discussions to possibly allow ‘green bonds’ NOT to count against budget deficits remains in focus, alongside debt issuance for energy purchases. If approved, it will offer a flood of fiscal support which would be positive for the EUR and EU equities. Geopolitics The EUR pushed lower aggressively after initial geopolitical scares but have been trying to carve out a base. Proximity to the war and the impact of sanctions remains a risk if the situation deteriorates. With lots of negatives already priced, chasing lows on bad news is not as attractive as chasing the EUR higher on good news.
3. CFTC Analysis
Very bearish signal from recent positioning update as all three major categories saw sizeable net-short weekly changes. The price action throughout the week has reflected this change in sentiment quite well.
4. The Week Ahead
The data is extremely light for the Eurozone next week with no major data events to take note of apart from final PMI data (which is unlikely to create a lot of volatility ). Thus, the biggest drivers for the EUR in the week ahead will be ECB speak, Geopolitics and of course the outcome of the FOMC. For the FOMC, the reaction in the USD will largely impact G10 FX across the board, and since the DXY is close to 60% weighted to the EUR that means any big USD moves will be important to watch for the EUR. For ECB speak, markets will be looking for any further comments about the possibility of a July rate hike by the ECB (STIR markets pricing in a 94%
probability of a July hike already). Any comments, especially from dovish ECB members could see some upside, but with a hike almost fully priced there might not be much more miles left in that tank. With a hike almost fully priced, the biggest risk from ECB speak in the week ahead is comments that sees markets pricing out a hike for July and could see some downside if that’s the case. For Geopolitics, the Eurogroup meetings will be watched closely for any further news on a potential oil embargo (with Germany reportedly warming up to the idea this week). It’s important to see the details of any embargo to assess the likely impact to the EUR. For example, will it be an immediate stop or gradual (if gradual how long), will it be specific amounts or a more phased approach, have the EZ already sourced alternative supply or not, what type of premium are they expected to pay if they have sourced from other suppliers. All these details will be necessary to be able to quantify how negative any embargo will be and how that will likely then impact the EUR.
CAD
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
The BoC delivered on expectations with a 50bsp hike as well as announcing a start to passive QT from the end of April by ending its reinvestment of maturing bonds. The bank upgraded both inflation and growth estimates as markets were expecting but did play a hawkish card by also increasing their neutral rate estimate to 2.5% from 2.25%. They acknowledged the growing risks from the current geopolitical situation but made it very clear that they are concerned about inflation and their hike of 50bsp showed that they think that policy needs to be normalized quickly (which some took as a hint that another 50bsp is on the way). The bank didn’t offer any additional clarity on QT but did note that they are not considering active QT of selling bonds just yet. Some conditionality also surfaced, where they explained that any sudden negative shocks to growth or inflation could see them pause hikes once they get closer towards neutral ( Gov Macklem also added that they might need to get rates slightly above neutral in the current cycle). Overall, it was a more hawkish than expected BoC decision, but interesting to note that STIR markets did not price in another 50bsp following the meeting (only a 25bsp) hike. We remain of the opinion that we are close to peak hawkishness for the BoC and are looking for the last push higher in the CAD for opportunities to sell.
2. Intermarket Analysis Considerations
Oil’s impressive post-covid recovery has been driven by many factors such as supply & demand , global demand recovery, and more recently geopolitical concerns. At current prices the risk to demand destruction and stagflation is high, which means we remain cautious of oil in the med-term . Reason for caution: Synchronised policy tightening targeting demand, slowing growth, consensus longs, steep backwardation curve, heightened implied volatility . We remain cautious oil , but geopolitics are a key driver and focus for Petro-currencies like the CAD (even though the CAD-Oil correlation has been hit and miss). The upcoming week has a new round of OPEC meetings where the cartel is once again expected to stick to their plans to up output by 430K BPD per month. It will be interesting though to see whether recent lockdowns in China, and possible oil embargo news from the EU impacts the OPEC discussions, if at all.
3. Global Risk Outlook
As a high-beta currency, the CAD usually benefits from overall positive risk sentiment as well as environments that benefit pro-cyclical assets. Thus, both short-term (immediate) and med-term (underlying) risk sentiment will always be a key consideration for the CAD.
4. CFTC Analysis
Very little change in CFTC data for the CAD. We think markets are setting up a similar path compared to April 2021, Oct 2021 and Jan 2022 where markets were too aggressive to price in CAD upside only to see majority of it unwind later. As always though, timing those shorts will be very important.
5. The Week Ahead
The highlight for the week ahead will be the jobs data scheduled for Friday, as well as oil market developments and risk sentiment. On the jobs data, this will be an interesting test for the Canadian labour market which have held up really well after bouncing back from the Omicron hick up. Even though we think the growth outlook for Canada is too optimistic, it might be too early to start seeing those growth concerns trickle into the jobs market as it is usually a late cycle indicator. However, in the event of a miss or a beat it might not change much in terms for the BoC just yet but given the frothy CAD price action a surprise miss could kickstart some overdue downside. Even though the correlation to oil has been rather hit and miss over the past few weeks, it’s always important to keep oil developments in mind, which means next week’s OPEC+ meetings could be an important event for Petro-currencies, especially with the possibility of oil embargo news from the EU as well. Then we also have risk sentiment to watch as the classic risk sensitivity that one would usually expect from high beta currencies like the AUD, CAD and NZD have seemingly returned with a vengeance in the past two trading weeks. That means overall risk sentiment will be an important driver to keep in mind for the CAD as well.
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
The ECB used the April meeting as a place holder meeting for the most part by not announcing any additional policy tweaks. The plans to phase out the APP into Q3 remained intact by reducing purchases from 40bln to 30bln in May and then down to 20bln in June. Markets were leaning towards a slightly more hawkish take from the bank (given recent inflation pressures), but the lack of conviction to remove the conditionality regarding the APP removal was seen as dovish. President Lagarde added to this dovish tone by explaining that Q3 has three months and IF the bank stops the APP, it could happen July, August or September. This was an important statement as the difference between a July and September end could mean the difference between a Q3 or
Q4 rate hike. The president also added to the dovish tone by stressing that risks for the economic outlook are tilted to the downside and have recently intensified with geopolitical and virus-related challenges. When asked about policy normalization, the president made a strange comment by saying it is premature to think about monpol normalisation. As the bank is currently embarking on normalization this comment seemed out of place and reaffirmed the overall dovish take from the meeting. There were the usual sources releases after the presser which said policymakers see a July hike as still possible after Thursday's meeting, which provided some reprieve. With inflation >7% and growth slowing, the June meeting which accompanies staff economic projections will be critical for markets to solidify whether expectations of 1 or 2 hikes this year is correct or not.
2. Economic & Health Developments
Growth differentials still favour the US over EU capital flows, but differentials have turned positive against the UK. Given growing stagflation fears the ECB is in a tough spot, being forced to normalize policy to try and combat inflation but could as a result damage growth. Ongoing EU fiscal discussions to possibly allow ‘green bonds’ NOT to count against budget deficits remains in focus, alongside debt issuance for energy purchases. If approved, it will offer a flood of fiscal support which would be positive for the EUR and EU equities. Geopolitics The EUR pushed lower aggressively after initial geopolitical scares but have been trying to carve out a base. Proximity to the war and the impact of sanctions remains a risk if the situation deteriorates. With lots of negatives already priced, chasing lows on bad news is not as attractive as chasing the EUR higher on good news.
3. CFTC Analysis
Very bearish signal from recent positioning update as all three major categories saw sizeable net-short weekly changes. The price action throughout the week has reflected this change in sentiment quite well.
4. The Week Ahead
The data is extremely light for the Eurozone next week with no major data events to take note of apart from final PMI data (which is unlikely to create a lot of volatility ). Thus, the biggest drivers for the EUR in the week ahead will be ECB speak, Geopolitics and of course the outcome of the FOMC. For the FOMC, the reaction in the USD will largely impact G10 FX across the board, and since the DXY is close to 60% weighted to the EUR that means any big USD moves will be important to watch for the EUR. For ECB speak, markets will be looking for any further comments about the possibility of a July rate hike by the ECB (STIR markets pricing in a 94%
probability of a July hike already). Any comments, especially from dovish ECB members could see some upside, but with a hike almost fully priced there might not be much more miles left in that tank. With a hike almost fully priced, the biggest risk from ECB speak in the week ahead is comments that sees markets pricing out a hike for July and could see some downside if that’s the case. For Geopolitics, the Eurogroup meetings will be watched closely for any further news on a potential oil embargo (with Germany reportedly warming up to the idea this week). It’s important to see the details of any embargo to assess the likely impact to the EUR. For example, will it be an immediate stop or gradual (if gradual how long), will it be specific amounts or a more phased approach, have the EZ already sourced alternative supply or not, what type of premium are they expected to pay if they have sourced from other suppliers. All these details will be necessary to be able to quantify how negative any embargo will be and how that will likely then impact the EUR.
CAD
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
The BoC delivered on expectations with a 50bsp hike as well as announcing a start to passive QT from the end of April by ending its reinvestment of maturing bonds. The bank upgraded both inflation and growth estimates as markets were expecting but did play a hawkish card by also increasing their neutral rate estimate to 2.5% from 2.25%. They acknowledged the growing risks from the current geopolitical situation but made it very clear that they are concerned about inflation and their hike of 50bsp showed that they think that policy needs to be normalized quickly (which some took as a hint that another 50bsp is on the way). The bank didn’t offer any additional clarity on QT but did note that they are not considering active QT of selling bonds just yet. Some conditionality also surfaced, where they explained that any sudden negative shocks to growth or inflation could see them pause hikes once they get closer towards neutral ( Gov Macklem also added that they might need to get rates slightly above neutral in the current cycle). Overall, it was a more hawkish than expected BoC decision, but interesting to note that STIR markets did not price in another 50bsp following the meeting (only a 25bsp) hike. We remain of the opinion that we are close to peak hawkishness for the BoC and are looking for the last push higher in the CAD for opportunities to sell.
2. Intermarket Analysis Considerations
Oil’s impressive post-covid recovery has been driven by many factors such as supply & demand , global demand recovery, and more recently geopolitical concerns. At current prices the risk to demand destruction and stagflation is high, which means we remain cautious of oil in the med-term . Reason for caution: Synchronised policy tightening targeting demand, slowing growth, consensus longs, steep backwardation curve, heightened implied volatility . We remain cautious oil , but geopolitics are a key driver and focus for Petro-currencies like the CAD (even though the CAD-Oil correlation has been hit and miss). The upcoming week has a new round of OPEC meetings where the cartel is once again expected to stick to their plans to up output by 430K BPD per month. It will be interesting though to see whether recent lockdowns in China, and possible oil embargo news from the EU impacts the OPEC discussions, if at all.
3. Global Risk Outlook
As a high-beta currency, the CAD usually benefits from overall positive risk sentiment as well as environments that benefit pro-cyclical assets. Thus, both short-term (immediate) and med-term (underlying) risk sentiment will always be a key consideration for the CAD.
4. CFTC Analysis
Very little change in CFTC data for the CAD. We think markets are setting up a similar path compared to April 2021, Oct 2021 and Jan 2022 where markets were too aggressive to price in CAD upside only to see majority of it unwind later. As always though, timing those shorts will be very important.
5. The Week Ahead
The highlight for the week ahead will be the jobs data scheduled for Friday, as well as oil market developments and risk sentiment. On the jobs data, this will be an interesting test for the Canadian labour market which have held up really well after bouncing back from the Omicron hick up. Even though we think the growth outlook for Canada is too optimistic, it might be too early to start seeing those growth concerns trickle into the jobs market as it is usually a late cycle indicator. However, in the event of a miss or a beat it might not change much in terms for the BoC just yet but given the frothy CAD price action a surprise miss could kickstart some overdue downside. Even though the correlation to oil has been rather hit and miss over the past few weeks, it’s always important to keep oil developments in mind, which means next week’s OPEC+ meetings could be an important event for Petro-currencies, especially with the possibility of oil embargo news from the EU as well. Then we also have risk sentiment to watch as the classic risk sensitivity that one would usually expect from high beta currencies like the AUD, CAD and NZD have seemingly returned with a vengeance in the past two trading weeks. That means overall risk sentiment will be an important driver to keep in mind for the CAD as well.
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.