CAD
FUNDAMENTAL BIAS: BULLISH
1. The Monetary Policy outlook for the BoC
At their September meeting the BoC delivered on market expectations by not providing any new information. The bank acknowledged the recent hit to growth has been bigger than expected, but also explained that they deem the hit to be temporary and still expect solid growth this year. They also reiterated that even though inflation is currently high and expected to climb, they deem current price pressures as being mostly transitory. The meeting did nothing to change the market’s expectations that the bank will go ahead to announce another round of tapering of C$1 billion at their October meeting, especially after the recent jobs report painted a picture of a growing and recovering labour market, albeit at a slightly slower pace compared to June and July.
2. Commodity-linked currency with dependency on Oil exports
Oil staged a massive recovery after hitting rock bottom in 2020. The move higher over the past few months has been driven by supply & demand (OPEC’s production cuts); improving global economic outlook and improving oil demand outlook, even though slightly pushed back by Delta concerns (vaccines and monetary and fiscal stimulus induced recoveries); rising inflation expectations. Even though further gains for Oil will arguably prove to be an uphill battle from here, the bias remains positive in the med-term as long as current supportive factors and drivers remains intact. We will of course have short-term ebbs and flows as we’ve seen in recent weeks which could affect the CAD from an intermarket point of view, but as long as the med-term view for Oil remains higher that should be supportive for Petro-currencies like the CAD.
3. Developments surrounding the global risk outlook.
As a high-beta currency, CAD has benefited from the market's improving risk outlook over recent months as participants moved out of safehavens and into riskier, higher-yielding assets. As a pro-cyclical currency, the CAD enjoyed upside alongside other cyclical assets going into what majority of market participants think was an early post-recession recovery phase. 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 the recent short-term jitters and risk off flows once again showed us why risk sentiment is also a very important short-term driver for the currency.
4. CFTC Analysis
Latest CFTC data (updated until 14 Sep) showed a positioning change of -3273 with a net non-commercial position of -9283. After some substantial unwinding of oversubscribed net-long positioning over the past couple of months, we’ve now seen CAD positioning move into netshort territory, and since the med-term bias is still bullish it means there is room left to run to the upside in line with the overall bullish fundamentals. Even though market expectations for Oct tapering is intact, markets have been reluctant to trade the CAD back in line with its fundamental bias. The USDCAD as a good example have of course seen large swings in the past two months, but despite them the pair remains largely unchanged from where we were trading two months ago. Patience might be required with this one until we get more clarity from incoming US data as well as expected tapering actions from the Fed.
JPY
FUNDAMENTAL BIAS: BEARISH
1. 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.
2. 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. The rangebound price action in US10Y from July has meant our conviction in JPY shorts has reduced versus the US Dollar , and until US10Y can convincingly break higher and take out its recent range highs we will stay more patient with USDJPY longs.
3. CFTC Analysis
Latest CFTC data (updated until 14 Sep) showed a positioning change of +2030 with a net non-commercial position of -60295. With positioning still, the largest net-short among the majors we want to be careful of the risks going into September which is historically the worse performing month for equities. That alone doesn’t mean we are expecting equities to push lower but given the frothy price action over recent weeks (haven’t seen a 5% correction in the S&P500 in 11 months) as well as seasonality and the growing chorus of participants calling for a bigger correction, we don’t want to ignore the possibility of some increased volatility this month. That doesn’t mean we start buying the JPY of course, it just means that if we do see some jitters creeping in for risk assets it is expected to be positive for the JPY, and with the biggest net-short for the majors there is a lot of downside in the JPY that can be unwound in such a scenario.
FUNDAMENTAL BIAS: BULLISH
1. The Monetary Policy outlook for the BoC
At their September meeting the BoC delivered on market expectations by not providing any new information. The bank acknowledged the recent hit to growth has been bigger than expected, but also explained that they deem the hit to be temporary and still expect solid growth this year. They also reiterated that even though inflation is currently high and expected to climb, they deem current price pressures as being mostly transitory. The meeting did nothing to change the market’s expectations that the bank will go ahead to announce another round of tapering of C$1 billion at their October meeting, especially after the recent jobs report painted a picture of a growing and recovering labour market, albeit at a slightly slower pace compared to June and July.
2. Commodity-linked currency with dependency on Oil exports
Oil staged a massive recovery after hitting rock bottom in 2020. The move higher over the past few months has been driven by supply & demand (OPEC’s production cuts); improving global economic outlook and improving oil demand outlook, even though slightly pushed back by Delta concerns (vaccines and monetary and fiscal stimulus induced recoveries); rising inflation expectations. Even though further gains for Oil will arguably prove to be an uphill battle from here, the bias remains positive in the med-term as long as current supportive factors and drivers remains intact. We will of course have short-term ebbs and flows as we’ve seen in recent weeks which could affect the CAD from an intermarket point of view, but as long as the med-term view for Oil remains higher that should be supportive for Petro-currencies like the CAD.
3. Developments surrounding the global risk outlook.
As a high-beta currency, CAD has benefited from the market's improving risk outlook over recent months as participants moved out of safehavens and into riskier, higher-yielding assets. As a pro-cyclical currency, the CAD enjoyed upside alongside other cyclical assets going into what majority of market participants think was an early post-recession recovery phase. 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 the recent short-term jitters and risk off flows once again showed us why risk sentiment is also a very important short-term driver for the currency.
4. CFTC Analysis
Latest CFTC data (updated until 14 Sep) showed a positioning change of -3273 with a net non-commercial position of -9283. After some substantial unwinding of oversubscribed net-long positioning over the past couple of months, we’ve now seen CAD positioning move into netshort territory, and since the med-term bias is still bullish it means there is room left to run to the upside in line with the overall bullish fundamentals. Even though market expectations for Oct tapering is intact, markets have been reluctant to trade the CAD back in line with its fundamental bias. The USDCAD as a good example have of course seen large swings in the past two months, but despite them the pair remains largely unchanged from where we were trading two months ago. Patience might be required with this one until we get more clarity from incoming US data as well as expected tapering actions from the Fed.
JPY
FUNDAMENTAL BIAS: BEARISH
1. 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.
2. 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. The rangebound price action in US10Y from July has meant our conviction in JPY shorts has reduced versus the US Dollar , and until US10Y can convincingly break higher and take out its recent range highs we will stay more patient with USDJPY longs.
3. CFTC Analysis
Latest CFTC data (updated until 14 Sep) showed a positioning change of +2030 with a net non-commercial position of -60295. With positioning still, the largest net-short among the majors we want to be careful of the risks going into September which is historically the worse performing month for equities. That alone doesn’t mean we are expecting equities to push lower but given the frothy price action over recent weeks (haven’t seen a 5% correction in the S&P500 in 11 months) as well as seasonality and the growing chorus of participants calling for a bigger correction, we don’t want to ignore the possibility of some increased volatility this month. That doesn’t mean we start buying the JPY of course, it just means that if we do see some jitters creeping in for risk assets it is expected to be positive for the JPY, and with the biggest net-short for the majors there is a lot of downside in the JPY that can be unwound in such a scenario.