AUD
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
The RBA’s Nov decision was hawkish in deed but dovish in word. The bank abandoned YCC as markets suspected as the bank didn’t defend their 3-year AGB target in the days leading into the meeting. They also abandoned their date-based forward guidance that said a lift off in rates would only be appropriate in 2024, by rather saying that conditions for a hike will take ‘some time’. However, Governor Lowe tried his best to sound as dovish as possible saying they are prepared to look through temporary spikes in inflation and that market pricing for a hike by 2022 is far away from where their outlook is and is highly unlikely. Even though not all market participants would agree, we think the outlook for growth, inflation, employment, and wages suggest a late 2022 hike could be possible, especially if the economy sees a solid bounce after covid. However, for now, the bank has stuck to an overall dovish tone. Given the importance of wages to their inflation outlook, keeping close track of incoming macro data for both will be important.
2. Economic & Health Developments
There are 4 key drivers we are watching for Australia’s med-term outlook: The virus situation – with Q3’s contraction out of the way, markets are watching Q4 data looking for signs of a strong rebound. Any good news of reduced restrictions will be important. China – the slowdown in China is important as it’s Australia’s biggest export destination. Markets are watching to see whether
the CCP or PBoC steps up with stimulus for the economy which will be seen as a positive for the AUD. Politically, the recent AUKUS defence pact could see retaliation from China against Australian goods. Commodities – Iron Ore, (24% of exports) continues its decline, and Coal prices (18% of exports) are down from YTD highs as well. This is negative for terms of trade and a risk to keep on
the radar. Global growth – as a favourite risk proxy, and closely tied to China, the market’s current question about whether we see reflation in Q4 will be an important consideration for the AUD.
3. 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 -16920 with a net non-commercial position of - 80185. With the recent risk off rout in markets the AUD has once again shifted to the highest held net-short among large specs and the 3rd largest net-short for leveraged funds. As outsized net-shorts are usually seen as a contrarian indicator we want to be mindful of potential squeezes, which means the AUD is likely to be more sensitive to positive data than negative data.
5. The Week Ahead
The main calendar event for the AUD in the week ahead is Tuesday’s upcoming RBA meeting where markets are largely expecting the bank to stick to their overall dovish tone, especially with the recent Omicron variant giving the bank enough reasons to stick to a patient and accommodative stance. Also keep in mind that recent incoming data has been fairly mixed with better-than-expected Q3 GDP at -1.9% versus expectations of -2.7% and Retail Sales topping estimates at 4.9% versus expectations of 2.5% BUT the latest jobs data disappointed with the Employment Change revealing a surprise contraction and Unemployment jumping to 5.6% from 4.6%. So, no reason for the RBA to change much for the upcoming meeting.
CAD
FUNDAMENTAL BIAS: WEAK BULLISH
1. Monetary Policy
At their Oct meeting the BoC surprised by putting an early end to QE purchases and updated forward guidance to suggest an earlier lift off in rates by projecting economic slack to be absorbed by the middle quarters of 2022. The initial reaction was bullish as one would expect but the biggest risk to further upside for the CAD from here is the fact that a lot of these positives that was confirmed by the BoC has already been reflected in both the CAD and rates markets over the past few weeks. The CAD has seen a similar run to the upside back in 1Q21 with the BoC’s hawkish tilt, and similarly to that we feel current prices for rates and the CAD already reflect a great deal of the positives. Thus, even though the med-term outlook remains tilted to the upside for the CAD, there is the risk of seeing some unwind of the recent upside and is something to be mindful of when making any medterm allocations to the upside in the CAD. Last week’s Oct CPI data was a good example of this where the currency saw outsized downside on an uninspiring print. It’s not that CPI was bad, it was broadly in line with expectations, but with all the positives already priced it would have taken a really exceptionally strong print to keep the CAD’s upside momentum going. Another interesting driver for the months ahead, which could put a break on the BoC’s hiking path, is the close to 350% debt to GDP for Canada, which will make it very painful if rates start rising and for some like HSBC means the hike cycle could be very short.
2. Intermarket Analysis Considerations
Oil’s massive post-covid recovery has been impressive, driven by three drivers: supply & demand (OPEC’s production cuts); improving global economic outlook and improving oil demand outlook, even though slightly pushed back by Delta concerns; rising inflation expectations. Even though further gains for Oil will arguably prove to be an uphill battle, the bias remains higher in the medterm as long as current supportive factors and drivers remains intact. Oil prices rallied after the US’s SPR release failed to spark any meaningful follow through, but last week’s covid scare was enough to see WTI drop over 12% in the session. Thus, this week’s upcoming OPEC meeting will be very important, as any announcement to pause planned productions cuts could spark some additional upside again.
3. 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 -10940 with a net non-commercial position of - 14075. A lot of the previous froth that was priced into the CAD just a few weeks ago has arguably been substantially reduced given the oil and Omicron related downside in risk assets over the past few sessions. That means buying opportunities is starting to look attractive again.
5. The Week Ahead
The main calendar event for the CAD in the week ahead is Wednesday’s upcoming BoC meeting. At the meeting markets will be focused on whether the recent Omicron variant is of any major concern to the BoC and whether the bank is also growing more concerned about inflation like the Fed. With the overall economic outlook evolving broadly in line with the bank’s MPR, there is expectations that the bank could err on the hawkish side despite the Omicron concerns, which should be positive for the CAD. Attention will be placed on any comments regarding the output gap to see whether the bank sees the gap being closed earlier (possibly Q1) which would imply the bank is bringing forward hike projections.
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
The RBA’s Nov decision was hawkish in deed but dovish in word. The bank abandoned YCC as markets suspected as the bank didn’t defend their 3-year AGB target in the days leading into the meeting. They also abandoned their date-based forward guidance that said a lift off in rates would only be appropriate in 2024, by rather saying that conditions for a hike will take ‘some time’. However, Governor Lowe tried his best to sound as dovish as possible saying they are prepared to look through temporary spikes in inflation and that market pricing for a hike by 2022 is far away from where their outlook is and is highly unlikely. Even though not all market participants would agree, we think the outlook for growth, inflation, employment, and wages suggest a late 2022 hike could be possible, especially if the economy sees a solid bounce after covid. However, for now, the bank has stuck to an overall dovish tone. Given the importance of wages to their inflation outlook, keeping close track of incoming macro data for both will be important.
2. Economic & Health Developments
There are 4 key drivers we are watching for Australia’s med-term outlook: The virus situation – with Q3’s contraction out of the way, markets are watching Q4 data looking for signs of a strong rebound. Any good news of reduced restrictions will be important. China – the slowdown in China is important as it’s Australia’s biggest export destination. Markets are watching to see whether
the CCP or PBoC steps up with stimulus for the economy which will be seen as a positive for the AUD. Politically, the recent AUKUS defence pact could see retaliation from China against Australian goods. Commodities – Iron Ore, (24% of exports) continues its decline, and Coal prices (18% of exports) are down from YTD highs as well. This is negative for terms of trade and a risk to keep on
the radar. Global growth – as a favourite risk proxy, and closely tied to China, the market’s current question about whether we see reflation in Q4 will be an important consideration for the AUD.
3. 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 -16920 with a net non-commercial position of - 80185. With the recent risk off rout in markets the AUD has once again shifted to the highest held net-short among large specs and the 3rd largest net-short for leveraged funds. As outsized net-shorts are usually seen as a contrarian indicator we want to be mindful of potential squeezes, which means the AUD is likely to be more sensitive to positive data than negative data.
5. The Week Ahead
The main calendar event for the AUD in the week ahead is Tuesday’s upcoming RBA meeting where markets are largely expecting the bank to stick to their overall dovish tone, especially with the recent Omicron variant giving the bank enough reasons to stick to a patient and accommodative stance. Also keep in mind that recent incoming data has been fairly mixed with better-than-expected Q3 GDP at -1.9% versus expectations of -2.7% and Retail Sales topping estimates at 4.9% versus expectations of 2.5% BUT the latest jobs data disappointed with the Employment Change revealing a surprise contraction and Unemployment jumping to 5.6% from 4.6%. So, no reason for the RBA to change much for the upcoming meeting.
CAD
FUNDAMENTAL BIAS: WEAK BULLISH
1. Monetary Policy
At their Oct meeting the BoC surprised by putting an early end to QE purchases and updated forward guidance to suggest an earlier lift off in rates by projecting economic slack to be absorbed by the middle quarters of 2022. The initial reaction was bullish as one would expect but the biggest risk to further upside for the CAD from here is the fact that a lot of these positives that was confirmed by the BoC has already been reflected in both the CAD and rates markets over the past few weeks. The CAD has seen a similar run to the upside back in 1Q21 with the BoC’s hawkish tilt, and similarly to that we feel current prices for rates and the CAD already reflect a great deal of the positives. Thus, even though the med-term outlook remains tilted to the upside for the CAD, there is the risk of seeing some unwind of the recent upside and is something to be mindful of when making any medterm allocations to the upside in the CAD. Last week’s Oct CPI data was a good example of this where the currency saw outsized downside on an uninspiring print. It’s not that CPI was bad, it was broadly in line with expectations, but with all the positives already priced it would have taken a really exceptionally strong print to keep the CAD’s upside momentum going. Another interesting driver for the months ahead, which could put a break on the BoC’s hiking path, is the close to 350% debt to GDP for Canada, which will make it very painful if rates start rising and for some like HSBC means the hike cycle could be very short.
2. Intermarket Analysis Considerations
Oil’s massive post-covid recovery has been impressive, driven by three drivers: supply & demand (OPEC’s production cuts); improving global economic outlook and improving oil demand outlook, even though slightly pushed back by Delta concerns; rising inflation expectations. Even though further gains for Oil will arguably prove to be an uphill battle, the bias remains higher in the medterm as long as current supportive factors and drivers remains intact. Oil prices rallied after the US’s SPR release failed to spark any meaningful follow through, but last week’s covid scare was enough to see WTI drop over 12% in the session. Thus, this week’s upcoming OPEC meeting will be very important, as any announcement to pause planned productions cuts could spark some additional upside again.
3. 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 -10940 with a net non-commercial position of - 14075. A lot of the previous froth that was priced into the CAD just a few weeks ago has arguably been substantially reduced given the oil and Omicron related downside in risk assets over the past few sessions. That means buying opportunities is starting to look attractive again.
5. The Week Ahead
The main calendar event for the CAD in the week ahead is Wednesday’s upcoming BoC meeting. At the meeting markets will be focused on whether the recent Omicron variant is of any major concern to the BoC and whether the bank is also growing more concerned about inflation like the Fed. With the overall economic outlook evolving broadly in line with the bank’s MPR, there is expectations that the bank could err on the hawkish side despite the Omicron concerns, which should be positive for the CAD. Attention will be placed on any comments regarding the output gap to see whether the bank sees the gap being closed earlier (possibly Q1) which would imply the bank is bringing forward hike projections.