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
Aggregate USD positioning remains close to 1 standard deviation above the mean, and close to prior tops where the USD topped out in previous cycles. That does not change the bullish outlook for the USD in the med-term but means that we would wait for pullbacks before initiating new longs with price at new cycle highs.
4. The Week Ahead
The week will be thin in terms of US economic data, with the Philly Fed Business Index and S&P Global Flash PMIs the main highlights. The focus here for the USD will once again be on the growth side, where another fasterthan-expected slowdown could be supportive for the USD given its usual inverse correlation to global growth expectations. In the event that growth data surprise higher though, we should not be surprised if we see the USD push lower afterwards, but we should also not get complacent in the growth-inspired reactions in the USD given how stretched prices have been. What that means is that we need to be mindful of the possibility that current USD bulls take some profit as we push into major and key 2020 resistance levels (2-year highs and new cycle
highs). As a growth hedge, the current environment of slowing growth and a hawkish Fed bodes well for the USD, which means the med-term bullish bias remains intact, but the risk to reward of chasing it at the highs is not very attractive right now, and means patience is not a bad idea right now.
CAD
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
The BoC delivered on expectations with a 50bsp hike as well as announcing a start to passive QT from the end of April by ending its reinvestment of maturing bonds. The bank upgraded both inflation and growth estimates as markets were expecting but did play a hawkish card by also increasing their neutral rate estimate to 2.5% from 2.25%. They acknowledged the growing risks from the current geopolitical situation but made it very clear that they are concerned about inflation and their hike of 50bsp showed that they think that policy needs to be normalized quickly (which some took as a hint that another 50bsp is on the way). The bank didn’t offer any additional clarity on QT but did note that they are not considering active QT of selling bonds just yet. Some conditionality also surfaced, where they explained that any sudden negative shocks to growth or inflation could see them pause hikes once they get closer towards neutral (Gov Macklem also added that they might need to get rates slightly above neutral in the current cycle). Overall, it was a more hawkish than expected BoC decision, but interesting to note that STIR markets did not price in another 50bsp following the meeting (only a 25bsp) hike. We remain of the opinion that we are close to peak hawkishness for the BoC and are looking for the last push higher in the CAD for opportunities to sell.
2. Intermarket Analysis Considerations
Oil’s impressive post-covid recovery has been driven by many factors such as supply & demand, global demand recovery, and more recently geopolitical concerns. At current prices the risk to demand destruction and stagflation is high, which means we remain cautious of oil in the med-term. Reason for caution: Synchronised policy tightening targeting demand, slowing growth, consensus longs, steep backwardation curve, heightened implied volatility. We remain cautious oil, but geopolitics are a key driver and focus for Petro-currencies like the CAD (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
Another bullish positioning signal with the recent positioning update. With Asset Manager net-longs still in the top 80 percentile we think markets are setting up a similar path compared to April 2021, Oct 2021 and Jan 2022 where markets were too aggressive to price in CAD upside only to see majority of it unwind later. For now, timing is very important, and we’re waiting for deeper pullbacks in AUDCAD & USDCAD for long opportunities.
5. The Week Ahead
For the week ahead the main data highlight for the CAD will be March CPI figures on Wednesday. Inflation will be important to watch as always (especially in the current macro backdrop), but with the BoC hiking 50bsp last week this week’s print won’t be enough to change the BoC’s mind. The event can of course create short-term volatility in the events of a big miss or beat. Despite the BoC providing some signals that another 50bsp could be on the table, STIR markets have not jumped to price it. Thus, a solid beat might see markets pricing in a 50bsp hike while a surprise miss could see markets sticking to a 25bsp but being close to peak hawkishness also means a miss could be a catalyst to get back on the short side for CAD. The correlation between WTI and CAD has been mostly hit and miss over the past couple of weeks, but that doesn’t mean we should ignore Oil’s potential impact on CAD price action. Thus, the energy market will be in focus as usual where any oil-positive developments could support the CAD while any oil-negative news could pressure the CAD.
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
Aggregate USD positioning remains close to 1 standard deviation above the mean, and close to prior tops where the USD topped out in previous cycles. That does not change the bullish outlook for the USD in the med-term but means that we would wait for pullbacks before initiating new longs with price at new cycle highs.
4. The Week Ahead
The week will be thin in terms of US economic data, with the Philly Fed Business Index and S&P Global Flash PMIs the main highlights. The focus here for the USD will once again be on the growth side, where another fasterthan-expected slowdown could be supportive for the USD given its usual inverse correlation to global growth expectations. In the event that growth data surprise higher though, we should not be surprised if we see the USD push lower afterwards, but we should also not get complacent in the growth-inspired reactions in the USD given how stretched prices have been. What that means is that we need to be mindful of the possibility that current USD bulls take some profit as we push into major and key 2020 resistance levels (2-year highs and new cycle
highs). As a growth hedge, the current environment of slowing growth and a hawkish Fed bodes well for the USD, which means the med-term bullish bias remains intact, but the risk to reward of chasing it at the highs is not very attractive right now, and means patience is not a bad idea right now.
CAD
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
The BoC delivered on expectations with a 50bsp hike as well as announcing a start to passive QT from the end of April by ending its reinvestment of maturing bonds. The bank upgraded both inflation and growth estimates as markets were expecting but did play a hawkish card by also increasing their neutral rate estimate to 2.5% from 2.25%. They acknowledged the growing risks from the current geopolitical situation but made it very clear that they are concerned about inflation and their hike of 50bsp showed that they think that policy needs to be normalized quickly (which some took as a hint that another 50bsp is on the way). The bank didn’t offer any additional clarity on QT but did note that they are not considering active QT of selling bonds just yet. Some conditionality also surfaced, where they explained that any sudden negative shocks to growth or inflation could see them pause hikes once they get closer towards neutral (Gov Macklem also added that they might need to get rates slightly above neutral in the current cycle). Overall, it was a more hawkish than expected BoC decision, but interesting to note that STIR markets did not price in another 50bsp following the meeting (only a 25bsp) hike. We remain of the opinion that we are close to peak hawkishness for the BoC and are looking for the last push higher in the CAD for opportunities to sell.
2. Intermarket Analysis Considerations
Oil’s impressive post-covid recovery has been driven by many factors such as supply & demand, global demand recovery, and more recently geopolitical concerns. At current prices the risk to demand destruction and stagflation is high, which means we remain cautious of oil in the med-term. Reason for caution: Synchronised policy tightening targeting demand, slowing growth, consensus longs, steep backwardation curve, heightened implied volatility. We remain cautious oil, but geopolitics are a key driver and focus for Petro-currencies like the CAD (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
Another bullish positioning signal with the recent positioning update. With Asset Manager net-longs still in the top 80 percentile we think markets are setting up a similar path compared to April 2021, Oct 2021 and Jan 2022 where markets were too aggressive to price in CAD upside only to see majority of it unwind later. For now, timing is very important, and we’re waiting for deeper pullbacks in AUDCAD & USDCAD for long opportunities.
5. The Week Ahead
For the week ahead the main data highlight for the CAD will be March CPI figures on Wednesday. Inflation will be important to watch as always (especially in the current macro backdrop), but with the BoC hiking 50bsp last week this week’s print won’t be enough to change the BoC’s mind. The event can of course create short-term volatility in the events of a big miss or beat. Despite the BoC providing some signals that another 50bsp could be on the table, STIR markets have not jumped to price it. Thus, a solid beat might see markets pricing in a 50bsp hike while a surprise miss could see markets sticking to a 25bsp but being close to peak hawkishness also means a miss could be a catalyst to get back on the short side for CAD. The correlation between WTI and CAD has been mostly hit and miss over the past couple of weeks, but that doesn’t mean we should ignore Oil’s potential impact on CAD price action. Thus, the energy market will be in focus as usual where any oil-positive developments could support the CAD while any oil-negative news could pressure the CAD.