AUD
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
In Dec the RBA kept rates at 0.10% and weekly bond purchases at A$4bln until mid-Feb, as expected. They reiterated that they are committed to maintaining highly supportive monetary conditions and won’t raise rates until actual inflation is sustainably within their 2%-3% target range. They noted that the economy is recovering from the Delta slowdown and is expected to return to pre-Delta path in 1H22. The positive take away from the meeting was that the Omicron variant is not expected to derail the recovery. The bank said they’ll consider the future of their QE program at the Feb meeting. Furthermore, the bank also outlined their criteria for deciding on the future of bond purchases, which include actions of other central banks, bond market functioning and actual and expected progress towards the goals of full employment and inflation consistent with the target. All in all, the bank still had a dovish stance but was more optimistic about the economy than expected.
2. Economic & Health Developments
There are 4 key drivers we are watching for Australia’s med-term outlook: The virus situation – so far, the RBA is positive about the post-Delta recovery, so incoming data will be crucial to see whether that optimism is justified. China – After months of waiting, the PBoC finally stepped up with easing & news of fiscal stimulus coming in early 2022 is a very important positive development for the AUD. Politically, the recent AUKUS defence pact could see retaliation from China against Australian goods. Commodities – Iron Ore, (24% of exports) and Coal prices (18% of exports) are important for terms of trade, and with both of them pushing higher on the PBoC easing, that is a positive for the AUD. Global growth – as a risk proxy, where the global economy goes from here will be another important consideration for AUD, with more focus on China though.
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 +2889 with a net non-commercial position of - 78903. 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. The recent positives from China and key Australian commodities already saw some shorts being squeezed out last week, and as long as Omicron doesn’t cause a global meltdown the prospects is starting to look better for the AUD going into 2022.
5. The Week Ahead
In the week ahead it’s going to be a bit of a snoozer out there with no major events, at least ones that the markets will really care about. That means overall risk sentiment will be a key driver for markets. On that front, Omicron developments will be on the radar as cases continue to rise and more countries are moving towards stricter lockdowns. The Fed’s hawkish tilt and what that means for the med-term growth and inflation outlook will also be interesting. Also keep in mind that this week will be very quiet with reduced participation as many desks closed last week, so liquidity will be thin, and volumes will be low which means lacklustre market but could also mean exacerbated volatility if we get important news crossing the wires. We do have the RBA minutes being released
on Tuesday which will be interesting given the slightly more optimistic tone from the bank at their recent policy meeting surrounding the Australian economy despite the Omicron risks.
JPY
FUNDAMENTAL BIAS: BEARISH
1. Monetary Policy
At their Dec meeting the BoJ kept policy mostly unchanged apart from unanimously voting to scale back emergency pandemic relief funding from March which includes tapering corporate bond and commercial paper buying, but they did also vote to extend a portion of the pandemic relief loan scheme to March for smaller firms. As always, the BoJ said they are ready to add additional stimulus and easing steps as the economy needs it. The bank reiterated that even though the economy has picked up it does still remain in a severe situation due to the COVID-19. The bank remains dovish and is unlikely going to change anytime soon.
2. Safe-haven status and overall risk outlook
As a safe-haven currency, the market's risk outlook is the primary driver of JPY. Economic data rarely proves market moving; and although monetary policy expectations can prove highly market-moving in the short-term, safe-haven flows are typically the more dominant factor. The market's overall risk tone has improved considerably following the pandemic with good news about successful vaccinations, and ongoing monetary and fiscal policy support paved the way for markets to expect a robust global economic recovery. Of course, there remains many uncertainties and many countries are continuing to fight virus waves, but as a whole the outlook has kept on improving over the past couple of months, which would expect safe-haven demand to diminish and result in a bearish outlook for the JPY.
3. Low-yielding currency with inverse correlation to US10Y
As a low yielding currency, the JPY usually shares an inverse correlation to strong moves in yield differentials, more specifically in strong moves in US10Y. However, like most correlations, the strength of the inverse correlation between the JPY and US10Y is not perfect and will ebb and flow depending on the type of market environment from a risk and cycle point of view. With the Fed tilting more aggressive, we think that opens up more room for curve flattening to take place with US02Y likely pushing higher while US10Y underperform. In this environment we do see some mild upside risks for the JPY, but we should not look at the influence from yields in isolation and also weigh it up alongside underlying risk sentiment and the USD of course.
4. CFTC Analysis
Latest CFTC data showed a positioning change of +9558 with a net non-commercial position of - 53523. Even though the JPY’s med-term outlook remains bearish, the big net-shorts for both large speculators and leveraged funds always increases the odds of mean reversion when risk sentiment deteriorates. However, the size of the recent unwind has been substantial and leaves room for some
downside if risk assets can see some recovery.
5. The Week Ahead
In the week ahead it’s going to be a bit of a snoozer out there with no major events, at least ones that the markets will really care about. That means overall risk sentiment will be a key driver for markets. On that front, Omicron developments will be on the radar as cases continue to rise and more countries are moving towards stricter lockdowns. The Fed’s hawkish tilt and what that means for the med-term growth and inflation outlook will also be interesting. Also keep in mind that this week will be very quiet with reduced participation as many desks closed last week, so liquidity will be thin, and volumes will be low which means lacklustre market but could also mean exacerbated volatility if we get important news crossing the wires. It’s also important to keep the JPY’s net-short positioning in mind, which means any major risk off flows is likely going to see the JPY a favourite safe haven as opposed to the CHF or USD (also keeping yields in mind of course).
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
In Dec the RBA kept rates at 0.10% and weekly bond purchases at A$4bln until mid-Feb, as expected. They reiterated that they are committed to maintaining highly supportive monetary conditions and won’t raise rates until actual inflation is sustainably within their 2%-3% target range. They noted that the economy is recovering from the Delta slowdown and is expected to return to pre-Delta path in 1H22. The positive take away from the meeting was that the Omicron variant is not expected to derail the recovery. The bank said they’ll consider the future of their QE program at the Feb meeting. Furthermore, the bank also outlined their criteria for deciding on the future of bond purchases, which include actions of other central banks, bond market functioning and actual and expected progress towards the goals of full employment and inflation consistent with the target. All in all, the bank still had a dovish stance but was more optimistic about the economy than expected.
2. Economic & Health Developments
There are 4 key drivers we are watching for Australia’s med-term outlook: The virus situation – so far, the RBA is positive about the post-Delta recovery, so incoming data will be crucial to see whether that optimism is justified. China – After months of waiting, the PBoC finally stepped up with easing & news of fiscal stimulus coming in early 2022 is a very important positive development for the AUD. Politically, the recent AUKUS defence pact could see retaliation from China against Australian goods. Commodities – Iron Ore, (24% of exports) and Coal prices (18% of exports) are important for terms of trade, and with both of them pushing higher on the PBoC easing, that is a positive for the AUD. Global growth – as a risk proxy, where the global economy goes from here will be another important consideration for AUD, with more focus on China though.
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 +2889 with a net non-commercial position of - 78903. 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. The recent positives from China and key Australian commodities already saw some shorts being squeezed out last week, and as long as Omicron doesn’t cause a global meltdown the prospects is starting to look better for the AUD going into 2022.
5. The Week Ahead
In the week ahead it’s going to be a bit of a snoozer out there with no major events, at least ones that the markets will really care about. That means overall risk sentiment will be a key driver for markets. On that front, Omicron developments will be on the radar as cases continue to rise and more countries are moving towards stricter lockdowns. The Fed’s hawkish tilt and what that means for the med-term growth and inflation outlook will also be interesting. Also keep in mind that this week will be very quiet with reduced participation as many desks closed last week, so liquidity will be thin, and volumes will be low which means lacklustre market but could also mean exacerbated volatility if we get important news crossing the wires. We do have the RBA minutes being released
on Tuesday which will be interesting given the slightly more optimistic tone from the bank at their recent policy meeting surrounding the Australian economy despite the Omicron risks.
JPY
FUNDAMENTAL BIAS: BEARISH
1. Monetary Policy
At their Dec meeting the BoJ kept policy mostly unchanged apart from unanimously voting to scale back emergency pandemic relief funding from March which includes tapering corporate bond and commercial paper buying, but they did also vote to extend a portion of the pandemic relief loan scheme to March for smaller firms. As always, the BoJ said they are ready to add additional stimulus and easing steps as the economy needs it. The bank reiterated that even though the economy has picked up it does still remain in a severe situation due to the COVID-19. The bank remains dovish and is unlikely going to change anytime soon.
2. Safe-haven status and overall risk outlook
As a safe-haven currency, the market's risk outlook is the primary driver of JPY. Economic data rarely proves market moving; and although monetary policy expectations can prove highly market-moving in the short-term, safe-haven flows are typically the more dominant factor. The market's overall risk tone has improved considerably following the pandemic with good news about successful vaccinations, and ongoing monetary and fiscal policy support paved the way for markets to expect a robust global economic recovery. Of course, there remains many uncertainties and many countries are continuing to fight virus waves, but as a whole the outlook has kept on improving over the past couple of months, which would expect safe-haven demand to diminish and result in a bearish outlook for the JPY.
3. Low-yielding currency with inverse correlation to US10Y
As a low yielding currency, the JPY usually shares an inverse correlation to strong moves in yield differentials, more specifically in strong moves in US10Y. However, like most correlations, the strength of the inverse correlation between the JPY and US10Y is not perfect and will ebb and flow depending on the type of market environment from a risk and cycle point of view. With the Fed tilting more aggressive, we think that opens up more room for curve flattening to take place with US02Y likely pushing higher while US10Y underperform. In this environment we do see some mild upside risks for the JPY, but we should not look at the influence from yields in isolation and also weigh it up alongside underlying risk sentiment and the USD of course.
4. CFTC Analysis
Latest CFTC data showed a positioning change of +9558 with a net non-commercial position of - 53523. Even though the JPY’s med-term outlook remains bearish, the big net-shorts for both large speculators and leveraged funds always increases the odds of mean reversion when risk sentiment deteriorates. However, the size of the recent unwind has been substantial and leaves room for some
downside if risk assets can see some recovery.
5. The Week Ahead
In the week ahead it’s going to be a bit of a snoozer out there with no major events, at least ones that the markets will really care about. That means overall risk sentiment will be a key driver for markets. On that front, Omicron developments will be on the radar as cases continue to rise and more countries are moving towards stricter lockdowns. The Fed’s hawkish tilt and what that means for the med-term growth and inflation outlook will also be interesting. Also keep in mind that this week will be very quiet with reduced participation as many desks closed last week, so liquidity will be thin, and volumes will be low which means lacklustre market but could also mean exacerbated volatility if we get important news crossing the wires. It’s also important to keep the JPY’s net-short positioning in mind, which means any major risk off flows is likely going to see the JPY a favourite safe haven as opposed to the CHF or USD (also keeping yields in mind of course).