AUD
FUNDAMENTAL BIAS: WEAK BULLISH
1. Monetary Policy
At their March meeting, the bank didn’t do much to surprise markets and stuck to a similar script compared to the previous meeting, with the exception of adding the Russia/Ukraine war as a major new source of uncertainty. While Unemployment is at 4.2% and expected to be below 4% throughout 2023, and with Inflation above the middle of the target range and expected to rise to 3.25 this year and stay at 2.75% throughout 2023, the continues dovish façade is getting a little embarrassing for the bank. Even though wage growth failed to surprise higher, consensus still expects it to reach 3% in Q2 and well above 3% in Q3, and once the 3% level is reached the RBA would have complete ran out of reasons to stay dovish. It’s clear that markets are looking straight through this though as STIR markets, bond yields and the AUD failed to see any real downside after the meeting and continued higher after a very brief and small dip lower. For now, the bank stays dovish, but the longer they stay in denial the longer the chances of a more aggressive hawkish pivot later.
2. Idiosyncratic Drivers & Intermarket Analysis
Apart from the RBA, there are 4 drivers we’re watching for the med-term outlook: Recovery – unlike other nations where growth & inflation is expected to slow, Australia is expected to see a solid post-covid recovery China – With the PBoC stepping up stimulus & expectations of further fiscal support expected in 1H22, the projected recovery in China bodes well for Australia as China makes up close to 40% of Australian exports. However, the AUKUS defence pact could see retaliation against Aussie goods and is worth keeping on the radar. Commodities – Iron Ore (24% of exports) and Coal (18% of exports) keep grinding higher for various reasons, one being China’s expected recovery and the other the energy and inflation concerns given the geopolitical risks, and as long as these commodities are supported, they should remain supported.
3. Global Risk Outlook
As a high-beta currency, the AUD 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 AUD.
4. CFTC Analysis
CFTC positioning data for the AUD was interesting with large spec seeing almost no change (remember we anticipated a lot more unwind in this week’s data), while leverage funds saw a hefty increase in net-shorts and asset managers a hefty reduction in shorts. The only thin common among all three is that we are still in net-short territory, which despite frothy upside in the AUD, can still see upside, but price action is stretched right now.
5. The Week Ahead
Right now, we think the Australian economy is well-placed compared to its peers as its economy is expected to recover alongside that of China (after going through a slowdown in 2021) just as other major economies are expected to slow. Even though markets have been pricing in a steep rate path for the RBA, we still think the large net-short positioning means lots of catch-up potential for the AUD. Even though recent wage data printed below target, market consensus still looks for 3% in Q2 and 3.5% by Q3, which means as long as inflation stays high (no expectation for that to slow as yet) and the labour market remains tight, the RBA should be next in line to tilt more hawkish, with a hike in rates very likely by the middle of the year. That means this week’s upcoming labour data will be important, where a good print will further solidify ideas of a policy pivot. The other intraweek focus is of course geopolitics, where the AUD has been well isolated from equity sell offs as key commodities like Iron Ore, Coal and LNG keep rising. However, with the amount of upside we’ve seen in a very short space of time we do need to be mindful of some possible mean reversion at some stage in the short-term. Counter-intuitively, if de-escalation news between Russia & Ukraine sees downside for commodity prices that would be expected to create a risk-on environment, which would usually be positive for the AUD, but it could end up weighing on the AUD if commodities drop, so we need view AUD through a commodity lens not just a risk sentiment lens. The other point to watch in the week ahead is the covid situation in China, which over the weekend saw China placing 17.5 million residents in Shenzhen under lockdown. At the same time there is also further speculation about more stimulus from the PBoC which could counter some of the negatives, but a risk worth keeping in mind.
CAD
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
The BoC did not surprise at their March meeting by hiking rates to 0.50% from 0.25% and continuing the reinvestment phase regarding asset purchases. The bank noted that the Russia/Ukraine war was a new major uncertainty for the economy and that as a result inflation is now expected to be higher in the near-term. They were optimistic about the growth outlook though and reiterated that it expects further interest rate rises will be needed. On the QT side, Gov Macklem noted that around 40% of the bank's bond holdings were due to mature within two years, and suggested that balance sheet could shrink quickly, and also added that they will
discuss ending the reinvestment phase and starting QT at the April meeting. The Governor also said he didn’t rule out the potential for 50bsp rate rises as oil is putting upside pressure on oil , noting that oil prices around $110 per barrel could add another percentage point to inflation . With markets implying close to another 5 hikes this year, we remain cautious on the currency as a slowing US and Canadian economy means the bank should struggle to maintain it’s current hawkish path in the weeks and months ahead.
2. Intermarket Analysis Considerations
Oil’s massive post-covid recovery has been impressive, driven by various factors such as supply & demand (OPEC’s production cuts), strong global demand recovery, and of course ‘higher for longer’ than expected inflation . The geopolitical crisis the world is facing right now have opened up a big push higher in WTI, trading at levels last seen since 2008 last week. With oil prices at these levels the risk to demand destruction and stagflation is higher than ever and means we remain cautious oil in the med-term . Reason for that view is: Synchronised policy tightening from DM central banks targeting demand, slowing growth and inflation , a consensus that is very long oil (growing calls for $100 WTI), very steep backwardation futures curve which usually sees negative forward returns, heightened implied volatility . However, recent geopolitical risks have been a key focus point for oil and means escalation and de-escalation will be important to watch.
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
We think the recent price action and positioning data has seen the CAD take a very similar path compared to April and Oct 2021 where markets were way too aggressive and optimistic to price in upside for the CAD, only to then see majority of it unwind. However, oil prices remain in focus as a key intermarket driver.
5. The Week Ahead
Markets might once more be getting too bullish on the CAD at the wrong time. The CAD, which has not really been benefiting from the big rise in energy prices, saw quite a jolt higher on Friday after the recent jobs report. At face value it was a good print, but under the hood it there was some negatives. Firstly, even though the headline printed above max expectations, the bulk of the gains were part-time jobs. Furthermore, if we account for last month’s contraction, full-time employment only grew by 40K. This week the calendar has CPI data, where another surprise upside print is expected by some to see an even more hawkish BoC . However, with over 6 hikes once again embedded and priced in STIR markets, and with WTI prices started to show some signs of a slowdown in bullish momentum, the odds are arguably tilted towards a more dovish as opposed to more hawkish BoC in the months ahead. However, the short-term could see further strength in the case of a beat, but we will use any additional upside in the CAD to look for selling opportunities.
FUNDAMENTAL BIAS: WEAK BULLISH
1. Monetary Policy
At their March meeting, the bank didn’t do much to surprise markets and stuck to a similar script compared to the previous meeting, with the exception of adding the Russia/Ukraine war as a major new source of uncertainty. While Unemployment is at 4.2% and expected to be below 4% throughout 2023, and with Inflation above the middle of the target range and expected to rise to 3.25 this year and stay at 2.75% throughout 2023, the continues dovish façade is getting a little embarrassing for the bank. Even though wage growth failed to surprise higher, consensus still expects it to reach 3% in Q2 and well above 3% in Q3, and once the 3% level is reached the RBA would have complete ran out of reasons to stay dovish. It’s clear that markets are looking straight through this though as STIR markets, bond yields and the AUD failed to see any real downside after the meeting and continued higher after a very brief and small dip lower. For now, the bank stays dovish, but the longer they stay in denial the longer the chances of a more aggressive hawkish pivot later.
2. Idiosyncratic Drivers & Intermarket Analysis
Apart from the RBA, there are 4 drivers we’re watching for the med-term outlook: Recovery – unlike other nations where growth & inflation is expected to slow, Australia is expected to see a solid post-covid recovery China – With the PBoC stepping up stimulus & expectations of further fiscal support expected in 1H22, the projected recovery in China bodes well for Australia as China makes up close to 40% of Australian exports. However, the AUKUS defence pact could see retaliation against Aussie goods and is worth keeping on the radar. Commodities – Iron Ore (24% of exports) and Coal (18% of exports) keep grinding higher for various reasons, one being China’s expected recovery and the other the energy and inflation concerns given the geopolitical risks, and as long as these commodities are supported, they should remain supported.
3. Global Risk Outlook
As a high-beta currency, the AUD 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 AUD.
4. CFTC Analysis
CFTC positioning data for the AUD was interesting with large spec seeing almost no change (remember we anticipated a lot more unwind in this week’s data), while leverage funds saw a hefty increase in net-shorts and asset managers a hefty reduction in shorts. The only thin common among all three is that we are still in net-short territory, which despite frothy upside in the AUD, can still see upside, but price action is stretched right now.
5. The Week Ahead
Right now, we think the Australian economy is well-placed compared to its peers as its economy is expected to recover alongside that of China (after going through a slowdown in 2021) just as other major economies are expected to slow. Even though markets have been pricing in a steep rate path for the RBA, we still think the large net-short positioning means lots of catch-up potential for the AUD. Even though recent wage data printed below target, market consensus still looks for 3% in Q2 and 3.5% by Q3, which means as long as inflation stays high (no expectation for that to slow as yet) and the labour market remains tight, the RBA should be next in line to tilt more hawkish, with a hike in rates very likely by the middle of the year. That means this week’s upcoming labour data will be important, where a good print will further solidify ideas of a policy pivot. The other intraweek focus is of course geopolitics, where the AUD has been well isolated from equity sell offs as key commodities like Iron Ore, Coal and LNG keep rising. However, with the amount of upside we’ve seen in a very short space of time we do need to be mindful of some possible mean reversion at some stage in the short-term. Counter-intuitively, if de-escalation news between Russia & Ukraine sees downside for commodity prices that would be expected to create a risk-on environment, which would usually be positive for the AUD, but it could end up weighing on the AUD if commodities drop, so we need view AUD through a commodity lens not just a risk sentiment lens. The other point to watch in the week ahead is the covid situation in China, which over the weekend saw China placing 17.5 million residents in Shenzhen under lockdown. At the same time there is also further speculation about more stimulus from the PBoC which could counter some of the negatives, but a risk worth keeping in mind.
CAD
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
The BoC did not surprise at their March meeting by hiking rates to 0.50% from 0.25% and continuing the reinvestment phase regarding asset purchases. The bank noted that the Russia/Ukraine war was a new major uncertainty for the economy and that as a result inflation is now expected to be higher in the near-term. They were optimistic about the growth outlook though and reiterated that it expects further interest rate rises will be needed. On the QT side, Gov Macklem noted that around 40% of the bank's bond holdings were due to mature within two years, and suggested that balance sheet could shrink quickly, and also added that they will
discuss ending the reinvestment phase and starting QT at the April meeting. The Governor also said he didn’t rule out the potential for 50bsp rate rises as oil is putting upside pressure on oil , noting that oil prices around $110 per barrel could add another percentage point to inflation . With markets implying close to another 5 hikes this year, we remain cautious on the currency as a slowing US and Canadian economy means the bank should struggle to maintain it’s current hawkish path in the weeks and months ahead.
2. Intermarket Analysis Considerations
Oil’s massive post-covid recovery has been impressive, driven by various factors such as supply & demand (OPEC’s production cuts), strong global demand recovery, and of course ‘higher for longer’ than expected inflation . The geopolitical crisis the world is facing right now have opened up a big push higher in WTI, trading at levels last seen since 2008 last week. With oil prices at these levels the risk to demand destruction and stagflation is higher than ever and means we remain cautious oil in the med-term . Reason for that view is: Synchronised policy tightening from DM central banks targeting demand, slowing growth and inflation , a consensus that is very long oil (growing calls for $100 WTI), very steep backwardation futures curve which usually sees negative forward returns, heightened implied volatility . However, recent geopolitical risks have been a key focus point for oil and means escalation and de-escalation will be important to watch.
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
We think the recent price action and positioning data has seen the CAD take a very similar path compared to April and Oct 2021 where markets were way too aggressive and optimistic to price in upside for the CAD, only to then see majority of it unwind. However, oil prices remain in focus as a key intermarket driver.
5. The Week Ahead
Markets might once more be getting too bullish on the CAD at the wrong time. The CAD, which has not really been benefiting from the big rise in energy prices, saw quite a jolt higher on Friday after the recent jobs report. At face value it was a good print, but under the hood it there was some negatives. Firstly, even though the headline printed above max expectations, the bulk of the gains were part-time jobs. Furthermore, if we account for last month’s contraction, full-time employment only grew by 40K. This week the calendar has CPI data, where another surprise upside print is expected by some to see an even more hawkish BoC . However, with over 6 hikes once again embedded and priced in STIR markets, and with WTI prices started to show some signs of a slowdown in bullish momentum, the odds are arguably tilted towards a more dovish as opposed to more hawkish BoC in the months ahead. However, the short-term could see further strength in the case of a beat, but we will use any additional upside in the CAD to look for selling opportunities.