USD
FUNDAMENTAL BIAS: BULLISH
1. Monetary Policy
In March the Fed delivered on a 25bsp hike as expected with Fed’s Bullard the only dissenter voting for a 50bsp hike. The Dot Plot saw a big upgrade from 3 hikes (Dec) to 7 hikes for 2022, with the FFR seen reaching 2.75%- 3.0% in 2023 before falling in 2024. They did however lower their neutral rate from 2.5% to 2.4% which were a negative. Inflation forecasts for 2022 were raised to 4.1% (previous 2.7%) but med-term inflation saw less aggressive upgrades. Even though the overall message and projections were hawkish, the fact that GDP estimates were lowered to 2.8% from 4.0% shows the Fed expects their actions to impact demand and also reflect some of the recent geopolitical uncertainties. The Fed didn’t share new details on QT but noted that the decision to start selling assets will be made at a coming meeting (markets consensus sees a July start as likely) and added that good progress in QT discussions means a May announcement is likely. During the presser the Chair expressed his view that the economy is doing really well and, should be more than able to withstand the incoming rate hikes (a very similar situation like we had in 4Q18). When asked whether 50bsp hikes could be on the table, the chair explained that the FOMC has not made decision to front-load hikes and will keep an eye on incoming inflation data to determine their policy actions going forward, but of course added that every incoming meeting was live. Overall, the Fed was hawkish, but due to very strong pre-positioning and close to peak hawkishness priced for STIR markets the meeting saw a ‘sell-the-fact’ reaction across major asset classes.
2. Global & Domestic Economy
As the reserve currency, the USD’s global usage means it’s usually inversely correlated to the global economy and global trade. The USD usually appreciates when growth & inflation slows (disinflation) and depreciates when growth & inflation accelerates (reflation). Thus, current expectations of a cyclical slowdown are a positive driver for the Dollar. Incoming data will be watched in relation to the ‘Fed Put’ as there are many similarities between now and 4Q18, where the Fed were also tightened into a slowdown. If growth data slows and the Fed stays hawkish it’s a positive for the USD, however if the Fed pivots dovish that’ll be a negative driver for the USD.
3. CFTC Analysis
The USD’s med-term bias remains bullish but positioning for large specs and asset managers are close to multiyear highs. That always increases risks of short-term corrections against the underlying trend. As the med-term bias is still bullish we don’t want to necessarily sell the USD into a slowing growth environment (see notes above), so we could rather opt to buy it versus weaker currencies which also seems stretched long (CAD comes to mind).
4. The Week Ahead
The USD had a solid week, trimming prior losses and getting close to the top of recent highs. The upside made sense from a technical perspective, after bouncing from key support around 97.70, but we do think there was more behind the upside. As the USD is usually inversely correlated to the growth outlook, the slowing in a few key economic data points didn’t bode well for the growth outlook. Despite another solid jobs report, other growth metrics slowed ( Personal Income , Personal Consumption, ISM Mfg PMI) which adds to other data which has also been slowing down (Retail Sales, Industrial Production, Consumer Sentiment and Confidence). All of this doesn’t mean a recession is imminent (even though the infamous 2s10s yield spread has inverted), it simply means that the expected slowdown in growth is showing up, but it’s showing a faster than expected move, which is important. After the dismal ISM Mfg PMI report (where the headline slowed more than expected while Prices Paid jolted higher – a typical stagflation print), the incoming ISM Services PMI print on Tuesday will be an important one to keep on the radar. As the Services sector makes up close to 70% of GDP, any big surprises (either good or bad) will get attention from the market. It’s important to see the USD in the right context though. Usually, bad data should be bad for the USD as it means less need for tightening policy from the Fed, but in the current context the focus is on growth, where an aggressive Fed mixed with a slowing economy usually sees a positive expected return for the global reserve currency. With that context in mind, the FOMC meeting minutes could ‘spook’ markets even further, but that seems like a stretched after so many Fed speakers voiced their opinions after the meeting. Geopolitical risks are still on the radar, and as the USD is a safe haven, any major escalations (expected to be USD positive) or de-escalations (expected to be USD negative) will also be in focus.
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 CPI , noting that oil prices around $110 per barrel could add another percentage point to inflation . With markets implying close to another 8 hikes this year, we remain cautious on the currency as a slowing US and Canadian economy means the bank could struggle to maintain its current hawkish path in the weeks and months ahead.
2. Intermarket Analysis Considerations
Oil’s impressive post-covid recovery has been driven by factors such as supply & demand (OPEC’s production cuts), strong global demand recovery, and of course ‘higher for longer’ inflation . The geopolitical crisis saw upside in WTI that reached levels last seen since in 2008. At these levels the risk to demand destruction and stagflation is high which means we remain cautious of oil in the med-term . Reason for that view is: Synchronised policy tightening from DM central banks targeting demand, slowing growth, consensus that is very long oil , steep backwardation curve (usually sees negative forward returns), heightened implied volatility . Even though we remain cautious on oil , the geopolitical risks remains a key focus for oil and thus for Petro-currencies like the CAD and NOK (even though the CAD-Oil correlation has been hit and miss).
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
Very bullish positioning signals with large specs and leveraged funds trimming shorts and asset managers adding a big 20K net-longs. It seems markets are warning to the idea of a 50bsp hike from the BoC after recent BoC comments. We continue to think recent price action is potentially setting up a similar path compared to April and Oct 2021 where markets were too aggressive and optimistic to price in upside for the CAD, only to then see majority of it unwind later. We’ll use any outsized strength for AUDCAD long opportunities.
5. The Week Ahead
There are two key economic releases in focus for the CAD this week with the Business Outlook Survey coming up on Monday and the Jobs report on Friday. With recent comments from the BoC turning up the hawkish rhetoric, the data this week will be eyed to get a better sense of whether the BoC will move by 25bsp or 50bsp at their next meeting. For the Business Outlook Survey markets participants are expecting a solid price due to increased commodity prices after the war broke out. Furthermore, the markets are looking for a continuation in the job gains, even though we’ve explained before that the previous print wasn’t all that it was made out to be with net-job gains not as spectacular as some made it out to be. After Friday’s solid US NFP, and after the recent BoC comments the jobs print and the Business Outlook Survey could be enough to push STIR markets over the edge and start pricing in a 50bsp. Even though that can certainly be positive for currency, we don’t have appetite to chase the CAD higher as it’s seen a lot of one-sided upsides which does make it vulnerable to correction. Our preferred longs are AUDCAD and USDCAD but waiting for a catalyst to trade looks like the best course of action right now.
FUNDAMENTAL BIAS: BULLISH
1. Monetary Policy
In March the Fed delivered on a 25bsp hike as expected with Fed’s Bullard the only dissenter voting for a 50bsp hike. The Dot Plot saw a big upgrade from 3 hikes (Dec) to 7 hikes for 2022, with the FFR seen reaching 2.75%- 3.0% in 2023 before falling in 2024. They did however lower their neutral rate from 2.5% to 2.4% which were a negative. Inflation forecasts for 2022 were raised to 4.1% (previous 2.7%) but med-term inflation saw less aggressive upgrades. Even though the overall message and projections were hawkish, the fact that GDP estimates were lowered to 2.8% from 4.0% shows the Fed expects their actions to impact demand and also reflect some of the recent geopolitical uncertainties. The Fed didn’t share new details on QT but noted that the decision to start selling assets will be made at a coming meeting (markets consensus sees a July start as likely) and added that good progress in QT discussions means a May announcement is likely. During the presser the Chair expressed his view that the economy is doing really well and, should be more than able to withstand the incoming rate hikes (a very similar situation like we had in 4Q18). When asked whether 50bsp hikes could be on the table, the chair explained that the FOMC has not made decision to front-load hikes and will keep an eye on incoming inflation data to determine their policy actions going forward, but of course added that every incoming meeting was live. Overall, the Fed was hawkish, but due to very strong pre-positioning and close to peak hawkishness priced for STIR markets the meeting saw a ‘sell-the-fact’ reaction across major asset classes.
2. Global & Domestic Economy
As the reserve currency, the USD’s global usage means it’s usually inversely correlated to the global economy and global trade. The USD usually appreciates when growth & inflation slows (disinflation) and depreciates when growth & inflation accelerates (reflation). Thus, current expectations of a cyclical slowdown are a positive driver for the Dollar. Incoming data will be watched in relation to the ‘Fed Put’ as there are many similarities between now and 4Q18, where the Fed were also tightened into a slowdown. If growth data slows and the Fed stays hawkish it’s a positive for the USD, however if the Fed pivots dovish that’ll be a negative driver for the USD.
3. CFTC Analysis
The USD’s med-term bias remains bullish but positioning for large specs and asset managers are close to multiyear highs. That always increases risks of short-term corrections against the underlying trend. As the med-term bias is still bullish we don’t want to necessarily sell the USD into a slowing growth environment (see notes above), so we could rather opt to buy it versus weaker currencies which also seems stretched long (CAD comes to mind).
4. The Week Ahead
The USD had a solid week, trimming prior losses and getting close to the top of recent highs. The upside made sense from a technical perspective, after bouncing from key support around 97.70, but we do think there was more behind the upside. As the USD is usually inversely correlated to the growth outlook, the slowing in a few key economic data points didn’t bode well for the growth outlook. Despite another solid jobs report, other growth metrics slowed ( Personal Income , Personal Consumption, ISM Mfg PMI) which adds to other data which has also been slowing down (Retail Sales, Industrial Production, Consumer Sentiment and Confidence). All of this doesn’t mean a recession is imminent (even though the infamous 2s10s yield spread has inverted), it simply means that the expected slowdown in growth is showing up, but it’s showing a faster than expected move, which is important. After the dismal ISM Mfg PMI report (where the headline slowed more than expected while Prices Paid jolted higher – a typical stagflation print), the incoming ISM Services PMI print on Tuesday will be an important one to keep on the radar. As the Services sector makes up close to 70% of GDP, any big surprises (either good or bad) will get attention from the market. It’s important to see the USD in the right context though. Usually, bad data should be bad for the USD as it means less need for tightening policy from the Fed, but in the current context the focus is on growth, where an aggressive Fed mixed with a slowing economy usually sees a positive expected return for the global reserve currency. With that context in mind, the FOMC meeting minutes could ‘spook’ markets even further, but that seems like a stretched after so many Fed speakers voiced their opinions after the meeting. Geopolitical risks are still on the radar, and as the USD is a safe haven, any major escalations (expected to be USD positive) or de-escalations (expected to be USD negative) will also be in focus.
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 CPI , noting that oil prices around $110 per barrel could add another percentage point to inflation . With markets implying close to another 8 hikes this year, we remain cautious on the currency as a slowing US and Canadian economy means the bank could struggle to maintain its current hawkish path in the weeks and months ahead.
2. Intermarket Analysis Considerations
Oil’s impressive post-covid recovery has been driven by factors such as supply & demand (OPEC’s production cuts), strong global demand recovery, and of course ‘higher for longer’ inflation . The geopolitical crisis saw upside in WTI that reached levels last seen since in 2008. At these levels the risk to demand destruction and stagflation is high which means we remain cautious of oil in the med-term . Reason for that view is: Synchronised policy tightening from DM central banks targeting demand, slowing growth, consensus that is very long oil , steep backwardation curve (usually sees negative forward returns), heightened implied volatility . Even though we remain cautious on oil , the geopolitical risks remains a key focus for oil and thus for Petro-currencies like the CAD and NOK (even though the CAD-Oil correlation has been hit and miss).
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
Very bullish positioning signals with large specs and leveraged funds trimming shorts and asset managers adding a big 20K net-longs. It seems markets are warning to the idea of a 50bsp hike from the BoC after recent BoC comments. We continue to think recent price action is potentially setting up a similar path compared to April and Oct 2021 where markets were too aggressive and optimistic to price in upside for the CAD, only to then see majority of it unwind later. We’ll use any outsized strength for AUDCAD long opportunities.
5. The Week Ahead
There are two key economic releases in focus for the CAD this week with the Business Outlook Survey coming up on Monday and the Jobs report on Friday. With recent comments from the BoC turning up the hawkish rhetoric, the data this week will be eyed to get a better sense of whether the BoC will move by 25bsp or 50bsp at their next meeting. For the Business Outlook Survey markets participants are expecting a solid price due to increased commodity prices after the war broke out. Furthermore, the markets are looking for a continuation in the job gains, even though we’ve explained before that the previous print wasn’t all that it was made out to be with net-job gains not as spectacular as some made it out to be. After Friday’s solid US NFP, and after the recent BoC comments the jobs print and the Business Outlook Survey could be enough to push STIR markets over the edge and start pricing in a 50bsp. Even though that can certainly be positive for currency, we don’t have appetite to chase the CAD higher as it’s seen a lot of one-sided upsides which does make it vulnerable to correction. Our preferred longs are AUDCAD and USDCAD but waiting for a catalyst to trade looks like the best course of action right now.