AUD
FUNDAMENTAL BIAS: NEUTRAL
1. The country’s economic and health developments
There are 3 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 – as Australia’s biggest export destination the current economic slowdown in China is important for the AUD, and markets are watching to see whether the government and PBoC steps up with expected stimulus for the economy, as well as the country’s real estate woes with the likes of Evergrande. Politics is also on the radar as the recent defence pact between the US, UK and Australia could see retaliation from China against Australian goods. [3] Iron Ore is Australia’s biggest export (24%), and the over 50% drop from YTD highs is a negatively driver on Australia’s terms of trade. However, the recent >40% climb in Coal prices (18% of exports) from the end of July should be able to offset the drag from Iron Ore. Even though China’s drive for a greener future weighed on Iron Ore, its currency energy crunch has been a key driver of higher Coal prices.
2. The Monetary Policy outlook for the RBA
At their previous meeting the RBA were hawkish in deed but not in word, by going ahead with their planned A$1 billion Sep tapering plans, but their statement and tone were overall dovish. They explained that even though they expect the economy to bounce back from covid, they are far less certain about the timing and pace of the bounce. They also moved their next assessment of the QE program to at least February, which means they essential both increased and extended their total QE package. It was a mixed bag for markets and meant the med-term bias remained neutral. Gov Lowe also surprised two weeks ago by strongly pushing back against market pricing for a late 2022 or early 2023 hike, explaining he doesn’t understand such pricing as rates is only seen rising in 2024. This, alongside developments in China arguably places the AUD on the verge of turning weak bearish from the current neutral outlook, but with the country’s vaccine drive picking up steam we could be looking at a possible recovery play for the AUD once the economy opens, so patient on the bias for now.
3. Developments surrounding the 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 -799 with a net non-commercial position of -86383. Keep in mind this data is updated until Tuesday 28 Sep, which means the push higher in the AUD from Wednesday won’t be reflected and means next week’s data is expected to see some unwind in net-shorts. However, at the current positioning levels for both large speculators and leveraged funds, the odds of seeing short squeezes higher is still on the card and risk to reward for chasing the AUD lower from here is not very attractive.
USD
FUNDAMENTAL BIAS: WEAK BULLISH
1. The Monetary Policy outlook for the FED
More hawkish than expected sums up the Sep meeting. The FOMC gave the go ahead for a November tapering announcement as long as the economy develops as expected with their criteria for substantial further progress close to being met. The biggest hawkish tilt was the announcement about a faster pace of tapering, with Chair Powell saying there is broad agreement that tapering can be concluded by mid2022. Inflation projections were hawkish, with the Fed projecting Core PCE above their 2% until 2024. On labour, Chair Powell said he thought the substantial further progress threshold for employment was ‘all but met’ and explained that it won’t take a very strong September jobs print for them to start tapering as just a ‘decent’ print will do. The 2022 Dots stayed very close to the June median, but the rate path was much steeper than markets were anticipating with seven hikes expected over the forecast horizon (from just two previously). It is important here to note though that even though the path was steeper, if one compares that to a projected Core PCE >2% for 2022 to 2024, the rate path does not exactly scream fear when it comes to inflation . All in all, it was a hawkish meeting. Interestingly, it took markets about three days to realize this as the expected price action only really took hold of markets a few days later. A faster tapering was a key factor we were watching for an incrementally bullish tilt in the outlook, so market’s initial reactions were surprising. However, with the recent breakout in both US yields and the USD, this has given us more confidence in moving our fundamental outlook for the Dollar from Neutral to Weak Bullish .
2. Real Yields
With a Q4 taper start and mid-2022 taper conclusion on the card, we think further downside in real yields will be a struggle and the probability are skewed higher given the outlook for growth, inflation and policy, and higher real yields should be supportive for the USD in the med-term .
3. The global risk outlook
One supporting factor for the USD from June was the onset of downside surprises in global growth. However, recent Covid-19 case data from ourworldindata. org has shown a sharp deceleration in new cases globally. Using past occurrences as a template, the reduction in cases is likely to lead to less restrictive measures, which is likely to lead to a strong bounce in economic activity. Thus, even though we have shifted our bias to weak bullish in the med-term , the fall in cases and increased likelihood of a bounce in economic activity could mean downside for the USD from a short to intermediate time horizon (remember a re-acceleration in growth and potentially inflation = reflation)
4. CFTC Analysis
Latest CFTC data showed a positioning change of +1361 with a net non-commercial position of +26461. Positioning isn’t anywhere near stress levels for the USD, but with both large speculators and leveraged funds sitting in net-long territory, it does mean that the Dollar could be more sensitive from mean reversion while still elevated after the recent push higher into new YTD highs.
5. Economic Data
This week we’ll finally have the September NFP print, but all the previous excitement about this event has been mitigated with the Fed’s previous meeting. The Fed’s comments that they don’t need to see a huge or stellar jobs print but that a decent print will do, has largely taken the sting out of the Sep NFP print. The current concerns about inflation means that the Average Hourly Earnings release could be of more interest for market participants to see whether the current labour supply shortage sparks further acceleration in wages.
FUNDAMENTAL BIAS: NEUTRAL
1. The country’s economic and health developments
There are 3 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 – as Australia’s biggest export destination the current economic slowdown in China is important for the AUD, and markets are watching to see whether the government and PBoC steps up with expected stimulus for the economy, as well as the country’s real estate woes with the likes of Evergrande. Politics is also on the radar as the recent defence pact between the US, UK and Australia could see retaliation from China against Australian goods. [3] Iron Ore is Australia’s biggest export (24%), and the over 50% drop from YTD highs is a negatively driver on Australia’s terms of trade. However, the recent >40% climb in Coal prices (18% of exports) from the end of July should be able to offset the drag from Iron Ore. Even though China’s drive for a greener future weighed on Iron Ore, its currency energy crunch has been a key driver of higher Coal prices.
2. The Monetary Policy outlook for the RBA
At their previous meeting the RBA were hawkish in deed but not in word, by going ahead with their planned A$1 billion Sep tapering plans, but their statement and tone were overall dovish. They explained that even though they expect the economy to bounce back from covid, they are far less certain about the timing and pace of the bounce. They also moved their next assessment of the QE program to at least February, which means they essential both increased and extended their total QE package. It was a mixed bag for markets and meant the med-term bias remained neutral. Gov Lowe also surprised two weeks ago by strongly pushing back against market pricing for a late 2022 or early 2023 hike, explaining he doesn’t understand such pricing as rates is only seen rising in 2024. This, alongside developments in China arguably places the AUD on the verge of turning weak bearish from the current neutral outlook, but with the country’s vaccine drive picking up steam we could be looking at a possible recovery play for the AUD once the economy opens, so patient on the bias for now.
3. Developments surrounding the 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 -799 with a net non-commercial position of -86383. Keep in mind this data is updated until Tuesday 28 Sep, which means the push higher in the AUD from Wednesday won’t be reflected and means next week’s data is expected to see some unwind in net-shorts. However, at the current positioning levels for both large speculators and leveraged funds, the odds of seeing short squeezes higher is still on the card and risk to reward for chasing the AUD lower from here is not very attractive.
USD
FUNDAMENTAL BIAS: WEAK BULLISH
1. The Monetary Policy outlook for the FED
More hawkish than expected sums up the Sep meeting. The FOMC gave the go ahead for a November tapering announcement as long as the economy develops as expected with their criteria for substantial further progress close to being met. The biggest hawkish tilt was the announcement about a faster pace of tapering, with Chair Powell saying there is broad agreement that tapering can be concluded by mid2022. Inflation projections were hawkish, with the Fed projecting Core PCE above their 2% until 2024. On labour, Chair Powell said he thought the substantial further progress threshold for employment was ‘all but met’ and explained that it won’t take a very strong September jobs print for them to start tapering as just a ‘decent’ print will do. The 2022 Dots stayed very close to the June median, but the rate path was much steeper than markets were anticipating with seven hikes expected over the forecast horizon (from just two previously). It is important here to note though that even though the path was steeper, if one compares that to a projected Core PCE >2% for 2022 to 2024, the rate path does not exactly scream fear when it comes to inflation . All in all, it was a hawkish meeting. Interestingly, it took markets about three days to realize this as the expected price action only really took hold of markets a few days later. A faster tapering was a key factor we were watching for an incrementally bullish tilt in the outlook, so market’s initial reactions were surprising. However, with the recent breakout in both US yields and the USD, this has given us more confidence in moving our fundamental outlook for the Dollar from Neutral to Weak Bullish .
2. Real Yields
With a Q4 taper start and mid-2022 taper conclusion on the card, we think further downside in real yields will be a struggle and the probability are skewed higher given the outlook for growth, inflation and policy, and higher real yields should be supportive for the USD in the med-term .
3. The global risk outlook
One supporting factor for the USD from June was the onset of downside surprises in global growth. However, recent Covid-19 case data from ourworldindata. org has shown a sharp deceleration in new cases globally. Using past occurrences as a template, the reduction in cases is likely to lead to less restrictive measures, which is likely to lead to a strong bounce in economic activity. Thus, even though we have shifted our bias to weak bullish in the med-term , the fall in cases and increased likelihood of a bounce in economic activity could mean downside for the USD from a short to intermediate time horizon (remember a re-acceleration in growth and potentially inflation = reflation)
4. CFTC Analysis
Latest CFTC data showed a positioning change of +1361 with a net non-commercial position of +26461. Positioning isn’t anywhere near stress levels for the USD, but with both large speculators and leveraged funds sitting in net-long territory, it does mean that the Dollar could be more sensitive from mean reversion while still elevated after the recent push higher into new YTD highs.
5. Economic Data
This week we’ll finally have the September NFP print, but all the previous excitement about this event has been mitigated with the Fed’s previous meeting. The Fed’s comments that they don’t need to see a huge or stellar jobs print but that a decent print will do, has largely taken the sting out of the Sep NFP print. The current concerns about inflation means that the Average Hourly Earnings release could be of more interest for market participants to see whether the current labour supply shortage sparks further acceleration in wages.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.