AUD
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
At their Feb meeting the RBA delivered on expectations by announcing an end to QE purchases, and also upgrading inflation and employment forecasts. These were seen as hawkish developments, but the bank tried as hard as possible to still keep up a dovish impression by saying the ceasing of QE does not imply near-term rate increases and stating that it’s still too early to conclude that inflation is sustainably within the target band despite recent CPI prints. The bank maintained their view that the cash rate will not increase until inflation is sustainably within the 2%-3% target band. Now, call me crazy, but on that front, the bank’s projections forecast inflation to reach close to 3.25% this year and then see it returning to 2.75% during 2023, which surely implied ‘sustainable’
inflation. Comments from Gov Lowe the following day were slightly less dovish though by acknowledging that achievement of their inflation and employment goals are within reach. He also noted that even though it remains to be seen if rates will increase this year, there are clearly scenarios where the bank would be hiking this year (which was a step away from the tone and language used in the statement) but added that it’s still plausible that a first-rate hike is a year or more away. The February decision and tone could be summed up as an incremental step away from ultra-easy policy and means we have changed our Dovish stance for the bank to neutral.
2. Idiosyncratic Drivers & Intermarket Analysis
Apart from the RBA, there are 4 drivers we’re watching for the med-term outlook: Covid - so far, the RBA has been optimistic about the recovery, but incoming employment and inflation data will be crucial to see if that optimism is justified. China – Even with PBoC stepping up stimulus & fiscal support expected in 1H22, the Covid-Zero policy poses a risk to China’s expected 2022 recovery and incoming data will be important. Politically, the AUKUS defence pact could see retaliation against Australian goods and is worth keeping on the radar. Commodities – Iron Ore (24% of exports) and Coal (18% of exports) are important for terms of trade, and with both pushing higher on PBoC easing, it’s a positive for the AUD if they remain supported. Global growth – as a risk proxy, the health of the global economy is important, which means expected slowdown in growth and inflation globally needs monitoring, but if China’s recovery is solid the fall out could be limited for the AUD.
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
Stretched positioning are usually a contrarian indicator and warning of potential squeezes. Thus, right now the AUD might be more sensitive to positive data or developments compared to negative ones as a lot of bad news has been priced in. With the RBA out of the way risk sentiment should be a more prominent driver.
5. The Week Ahead
In the week ahead our focus for the Aussie will turn to jobs data as well as risk sentiment. On the jobs side, consensus expects the Omicron scare to have negatively impacts job employment, with forecasts anticipating a contraction of -15K. According to Westpac, the expected drop should not be enough to change the Unemployment Rate as the Participation Rate is expected to contract as well, and on that front the investment bank says there is a risk that the Unemployment Rate sees a further push lower as a result of that. Another solid beat (if we get one) should further increase chances of a RBA pivot in the meetings ahead, while a miss in the data would be a good sentiment test, as we are expecting any drops in the AUD on a miss to offer buying opportunities. As far as markets are concerned, the most important data point we’ll get before the March policy meeting is the wage index coming up on the 23rd of February, which means even though employment data is important, there are bigger fish to fry on the data side. HOWEVER, after Friday’s warning from the US regarding an imminent Russia invasion of Ukraine, risk sentiment might be the bigger driver for the AUD next week, where any negative escalation should be negative for risk and add pressure on the AUD while any de-escalation should be risk positive, thus giving support.
CAD
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
Despite STIR markets pricing in close to an 80% chance of a 25bsp hike, the BoC chose to leave rates unchanged at their Jan meeting. However, the bank removed its extraordinary forward guidance and said they now think the economic slack has been absorbed (previously expected to occur somewhere in the middle quarters of 2022). The bank also explained that they expect rates will need to rise based on the progress of inflation, and Gov Macklem explained their only reason for not hiking was uncertainty surrounding Omicron. The statement gave a clear signal that a March hike is on the table. Furthermore, on the balance sheet the bank delivered on expectations by noting they will likely exit the reinvestment phase as rates begin to rise. Even though 2022 inflation projections were upgraded, the bank also downgraded growth forecasts (which in our view remains a key reason why current STIR market expectations are not realistic). Thus, the meeting had both dovish and hawkish elements to it, and thus means we are still happy to hold to a neutral bias for the CAD.
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. Even though Oil has traded to new 7-year highs, we think the current Russia/Ukraine tensions and recent tight capacity concerns are the biggest contributors to the upside as our cautious view going into Q1 & Q2 remain intact. The drivers keeping us cautious are A hawkish DM central banks targeting demand, slowing growth and inflation, lower inflation expectations (due to the Fed), a consensus that is very long oil (growing callsfor $100 WTI). Friday’s geopolitical risks regarding Russia/Ukraine saw Oil prices jolting higher, and any escalation or de-escalation of those tensions will be an important driver for Oil in the week ahead.
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. CAD could be setting up for a similar disappointment with money markets too aggressive on rate expectations for 2022, but oil prices remain a big supporting driver to keep in mind.
5. The Week Ahead
Focus for the CAD is threefold this week with CPI, risk sentiment and Oil. For CPI, the BoC made it very clear in their Jan meeting that a March hike is on the way and STIR markets have priced in a 100% chance of a hike. Thus, a beat in the CPI should not change much for the BoC or STIR markets with more than 6 hikes priced in already. However, if we were to have a bigger-than-expected miss, that might not change much for the BoC who would want to look through one single data point, but it could be enough to see STIR markets price out some of the froth, which would weigh on CAD. On risk sentiment and Oil, it’s a mixed bag for the CAD. After
Friday’s warning from the US regarding an imminent Russia invasion of Ukraine, risk sentiment is in focus for the CAD next week, where any negative escalation should be negative for risk and add pressure on the CAD while any de-escalation should be risk positive, thus giving support. On the oil front, the Friday invasion warnings saw Oil prices jolt higher as a Russian invasion poses serious concerns regarding energy supply for both oil and Natural Gas. Thus, risk sentiment and oil will create a messy environment for the CAD next week, as escalation should be risk negative (CAD negative) but also oil positive (CAD positive), and vice versa for any de-escalation. This makes for a very tricky environment for the CAD in the week ahead.
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
At their Feb meeting the RBA delivered on expectations by announcing an end to QE purchases, and also upgrading inflation and employment forecasts. These were seen as hawkish developments, but the bank tried as hard as possible to still keep up a dovish impression by saying the ceasing of QE does not imply near-term rate increases and stating that it’s still too early to conclude that inflation is sustainably within the target band despite recent CPI prints. The bank maintained their view that the cash rate will not increase until inflation is sustainably within the 2%-3% target band. Now, call me crazy, but on that front, the bank’s projections forecast inflation to reach close to 3.25% this year and then see it returning to 2.75% during 2023, which surely implied ‘sustainable’
inflation. Comments from Gov Lowe the following day were slightly less dovish though by acknowledging that achievement of their inflation and employment goals are within reach. He also noted that even though it remains to be seen if rates will increase this year, there are clearly scenarios where the bank would be hiking this year (which was a step away from the tone and language used in the statement) but added that it’s still plausible that a first-rate hike is a year or more away. The February decision and tone could be summed up as an incremental step away from ultra-easy policy and means we have changed our Dovish stance for the bank to neutral.
2. Idiosyncratic Drivers & Intermarket Analysis
Apart from the RBA, there are 4 drivers we’re watching for the med-term outlook: Covid - so far, the RBA has been optimistic about the recovery, but incoming employment and inflation data will be crucial to see if that optimism is justified. China – Even with PBoC stepping up stimulus & fiscal support expected in 1H22, the Covid-Zero policy poses a risk to China’s expected 2022 recovery and incoming data will be important. Politically, the AUKUS defence pact could see retaliation against Australian goods and is worth keeping on the radar. Commodities – Iron Ore (24% of exports) and Coal (18% of exports) are important for terms of trade, and with both pushing higher on PBoC easing, it’s a positive for the AUD if they remain supported. Global growth – as a risk proxy, the health of the global economy is important, which means expected slowdown in growth and inflation globally needs monitoring, but if China’s recovery is solid the fall out could be limited for the AUD.
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
Stretched positioning are usually a contrarian indicator and warning of potential squeezes. Thus, right now the AUD might be more sensitive to positive data or developments compared to negative ones as a lot of bad news has been priced in. With the RBA out of the way risk sentiment should be a more prominent driver.
5. The Week Ahead
In the week ahead our focus for the Aussie will turn to jobs data as well as risk sentiment. On the jobs side, consensus expects the Omicron scare to have negatively impacts job employment, with forecasts anticipating a contraction of -15K. According to Westpac, the expected drop should not be enough to change the Unemployment Rate as the Participation Rate is expected to contract as well, and on that front the investment bank says there is a risk that the Unemployment Rate sees a further push lower as a result of that. Another solid beat (if we get one) should further increase chances of a RBA pivot in the meetings ahead, while a miss in the data would be a good sentiment test, as we are expecting any drops in the AUD on a miss to offer buying opportunities. As far as markets are concerned, the most important data point we’ll get before the March policy meeting is the wage index coming up on the 23rd of February, which means even though employment data is important, there are bigger fish to fry on the data side. HOWEVER, after Friday’s warning from the US regarding an imminent Russia invasion of Ukraine, risk sentiment might be the bigger driver for the AUD next week, where any negative escalation should be negative for risk and add pressure on the AUD while any de-escalation should be risk positive, thus giving support.
CAD
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
Despite STIR markets pricing in close to an 80% chance of a 25bsp hike, the BoC chose to leave rates unchanged at their Jan meeting. However, the bank removed its extraordinary forward guidance and said they now think the economic slack has been absorbed (previously expected to occur somewhere in the middle quarters of 2022). The bank also explained that they expect rates will need to rise based on the progress of inflation, and Gov Macklem explained their only reason for not hiking was uncertainty surrounding Omicron. The statement gave a clear signal that a March hike is on the table. Furthermore, on the balance sheet the bank delivered on expectations by noting they will likely exit the reinvestment phase as rates begin to rise. Even though 2022 inflation projections were upgraded, the bank also downgraded growth forecasts (which in our view remains a key reason why current STIR market expectations are not realistic). Thus, the meeting had both dovish and hawkish elements to it, and thus means we are still happy to hold to a neutral bias for the CAD.
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. Even though Oil has traded to new 7-year highs, we think the current Russia/Ukraine tensions and recent tight capacity concerns are the biggest contributors to the upside as our cautious view going into Q1 & Q2 remain intact. The drivers keeping us cautious are A hawkish DM central banks targeting demand, slowing growth and inflation, lower inflation expectations (due to the Fed), a consensus that is very long oil (growing callsfor $100 WTI). Friday’s geopolitical risks regarding Russia/Ukraine saw Oil prices jolting higher, and any escalation or de-escalation of those tensions will be an important driver for Oil in the week ahead.
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. CAD could be setting up for a similar disappointment with money markets too aggressive on rate expectations for 2022, but oil prices remain a big supporting driver to keep in mind.
5. The Week Ahead
Focus for the CAD is threefold this week with CPI, risk sentiment and Oil. For CPI, the BoC made it very clear in their Jan meeting that a March hike is on the way and STIR markets have priced in a 100% chance of a hike. Thus, a beat in the CPI should not change much for the BoC or STIR markets with more than 6 hikes priced in already. However, if we were to have a bigger-than-expected miss, that might not change much for the BoC who would want to look through one single data point, but it could be enough to see STIR markets price out some of the froth, which would weigh on CAD. On risk sentiment and Oil, it’s a mixed bag for the CAD. After
Friday’s warning from the US regarding an imminent Russia invasion of Ukraine, risk sentiment is in focus for the CAD next week, where any negative escalation should be negative for risk and add pressure on the CAD while any de-escalation should be risk positive, thus giving support. On the oil front, the Friday invasion warnings saw Oil prices jolt higher as a Russian invasion poses serious concerns regarding energy supply for both oil and Natural Gas. Thus, risk sentiment and oil will create a messy environment for the CAD next week, as escalation should be risk negative (CAD negative) but also oil positive (CAD positive), and vice versa for any de-escalation. This makes for a very tricky environment for the CAD in the week ahead.