Heading into todays European session, risk tone is leaning risk on. Asia pacific indices are positive, measures of volatility subdued and safe havens pressured.
Australian Dollar ( AUD) Fundamental bias - Neutral
1. Country's health and developments. There are 4 key drivers we are watching for Australia’s med-term outlook: [1] The virus situation – a Q3 GDP contraction is priced in so the question now is whether restrictions can be lifted in time to see a Q4 rebound. [2] China – the current slowdown in China is important as it’s Australia’s biggest export destination. Markets are watching to see whether the CCP and PBoC steps up with stimulus for the economy and possible support for the real estate sector. Politically, the recent defence pact between the US, UK and Australia could see retaliation from China against Australian goods. [3] Iron Ore – as Australia’s biggest export (24%), the over 50% drop in Iron Ore from YTD highs is a negative driver for terms of trade, but the recent >70% climb in Coal prices (18% of exports) in recent weeks have offset the fall in Iron Ore. Even though China’s green initiatives weighed on Iron Ore, the current energy crunch has been a key driver of higher Coal prices. [4] Global growth – as a favourite risk proxy, the recent fall in global case numbers and potential for a strong bounce in global activity data will be important.
2. Monetary policy outlook for the RBA
At their Oct meeting the RBA kept all policy measures unchanged and confirmed market expectations that the bank will use the meeting to kick the can down the road. They reiterated prior guidance that their central scenario expects the economy to only reach appropriate conditions for higher rates by 2024. Similar comments were made about wage and price pressures, with the bank explaining that they are still subdued, and remains a key focus point for the bank. On the labour market there was positives and negatives. The negatives were a nearly 4% drop for hours worked in August (the best indicator of labour market conditions right now, according to the bank), but on the positive side they also noted that data on job vacancies have shown that companies are seeking to hire workers ahead of the expected economic reopening in October. The bank shared similar thoughts about the virus situation, stating that lockdowns are expected to see material downside to Q3 GDP but that they still expect a solid rebound as vaccination rates increase and restrictive measures are eased. Thus, incoming virus and economic data remains a key consideration for the RBA.
3. Developments surrounding the global 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
atest CFTC data showed a positioning change of -3596 with a net non-commercial position of -89979. As most of the AUD’s mean reversion this past week took place from Tuesday the most of it won’t reflect in current positioning data. With net-shorts for large speculators still at historical levels and leveraged funds also increasing shorts, the odds of seeing short squeezes higher is still on the cards and risk to reward for chasing the AUD lower from here remains unattractive.
Swiss Franc ( CHF) Fundamental bias - Bearish
1. Developments surrounding the global risk outlook.
As a safe-haven currency, the market's risk outlook is the primary driver for the CHF with Swiss economic data or SNB policy meetings rarely being very market moving. Although SNB intervention can have a substantial impact on CHF, its impact tends to be relatively short-lived. Additionally, the SNB are unlikely to adjust policy anytime soon, given their overall dovish disposition and preference for being behind the ECB in terms of policy decisions. The market's overall risk tone improved considerably after the pandemic as a result of the global vaccine roll out and the unprecedented amount of monetary policy accommodation and fiscal support from governments. The Delta variant and subsequent impact on growth expectations is of course a sobering reminder that risks remain. Thus, there is still a degree of uncertainty and risks to the overall risk outlook remains which could prove supportive for the safe havens like the CHF should negative factors for the global economy develop. However, on balance the overall risk outlook is still positive in the med-term and barring any major meltdowns in risk assets the bias for the CHF remains bearish in the med-term.
2. Idiosyncratic drivers for the CHF
espite the negative drivers, the CHF saw some surprisingly strength from June. This divergence from the fundamental outlook didn’t make much sense, but the CHF often has a mind of its own and can often move in opposite directions from what short-term sentiment or its fundamental outlook suggests. Recent research from the team has revealed an interesting correlation between the CHF and simultaneous price action in both Gold and the USD which could explain some of the recent price action. We also need to be careful of the possibility of SNB FX intervention. Apart from that, ING investment bank has recently argued that recent CHF strength could be due to the lower inflation in Switzerland compared to the EU which meant that the real trade-weighted CHF has been trading too cheap. They also expanded that the ECB’s bond buying has meant that their balance sheet is expanding more rapidly compared to that of the SNB, which could have been reasons why the SNB did not see the need for any meaningful FX intervention lately. The bottom line is that there are often plenty of idiosyncratic drivers which might or might not impact the CHF and makes short-term price fluctuations a mixed bag for the most part.
3. CFTC Analysis
Latest CFTC data showed a positioning change of -4092 with a net non-commercial position of -15679. The CHF positioning continued to unwind some of its recent surprising strength over the past few weeks. The CHF is back inside net-short territory as one would expect from a currency with an overall med-term bearish outlook. Even though we expect the currency to continue weakening in the med-term, any drastic escalation in risk off tones could continue to provide support for the safe-haven currency in the short-term and is always something to keep in mind.