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). The upcoming week has a new round of OPEC meetings where the cartel is once again expected to stick to their plans to up output by 430K BPD per month. It will be interesting though to see whether recent lockdowns in China, and possible oil embargo news from the EU impacts the OPEC discussions, if at all.
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 little change in CFTC data for the CAD. 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. As always though, timing those shorts will be very important.
5. The Week Ahead
The highlight for the week ahead will be the jobs data scheduled for Friday, as well as oil market developments and risk sentiment. On the jobs data, this will be an interesting test for the Canadian labour market which have held up really well after bouncing back from the Omicron hick up. Even though we think the growth outlook for Canada is too optimistic, it might be too early to start seeing those growth concerns trickle into the jobs market as it is usually a late cycle indicator. However, in the event of a miss or a beat it might not change much in terms for the BoC just yet but given the frothy CAD price action a surprise miss could kickstart some overdue downside. Even though the correlation to oil has been rather hit and miss over the past few weeks, it’s always important to keep oil developments in mind, which means next week’s OPEC+ meetings could be an important event for Petro-currencies, especially with the possibility of oil embargo news from the EU as well. Then we also have risk sentiment to watch as the classic risk sensitivity that one would usually expect from high beta currencies like the AUD, CAD and NZD have seemingly returned with a vengeance in the past two trading weeks. That means overall risk sentiment will be an important driver to keep in mind for the CAD as well.
JPY
FUNDAMENTAL BIAS: BEARISH
1. Monetary Policy
The BoJ kept all policy settings unchanged at their April meeting, which was in line with broad consensus expectations, but given the price action after the event did imply that a sizeable chunk of the market was expecting something more (us included). Due to the JPY weakness in recent weeks, markets wanted to see whether the bank would potentially increase their Yield Curve Control target band from 0.25%--0.25% to 0.50%--0.50%. But the bank decided to stick to their guns and maintain their ultra-easy policy despite the rapid depreciation of the JPY. The bank doubled down by saying they will conduct special open market operations on every working day as needed to keep the 10-year GBP capped at 0.25%. As expected, the bank reiterated their view that rates will stay low for the foreseeable future and won’t hesitate to add stimulus if the economy needs it. On the JPY, Gov Kuroda made familiar comments by saying they desire stable currency moves which reflect economic fundamentals. As a result of the bank’s inaction, all eyes will now be on the MoF to intervene if the rapid depreciation of the JPY continues.
2. Safe-haven status and overall risk outlook
As a safe-haven currency, the market's risk outlook is usually the primary driver. Economic data rarely proves market moving, and although monetary policy expectations can affect the JPY in the short-term, safe-haven flows are typically more dominant. Even though the market’s overall risk tone saw a huge recovery and risk-on frenzy from the middle of 2020 to the end of 2021, recent developments have increased risks. With central banks tightening policy into an economic slowdown, risk appetite is jittery. Even though that doesn’t change our med-term bias for the JPY, it does means we should expect more risk sentiment ebbs and flows this year, and the heightened volatility can create strong directional moves in the JPY, as long as yields play their part.
3. Low-yielding currency with inverse correlation to US10Y
As a low yielding currency, the JPY usually shares a strong inverse correlation to moves in US yield differentials. Like most correlations, the strength of the inverse correlation between the JPY and US10Y isn’t perfect and will ebb and flow depending on the market environment from both 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. In this environment there could be mild upside risks for the JPY if US10Y corrects, but we shouldn’t look at the yield correlation in isolation and also weigh it alongside risk sentiment and price action in other safe havens.
4. CFTC Analysis
Very chunky unwind in net-short in the recent CFTC update, but positioning is still very stretched with aggregate JPY positioning still close to 2 standard dev away from a 15-year mean. Even though the med-term outlook remains bearish , the risk to reward to chase the currency lower from here is not very attractive.
5. The Week Ahead
For the week ahead, the focus will remain on the key drivers which is US10Y and more recently risk sentiment. Given the move in yield differentials and commodity prices, the JPY had very little safe haven appeal over recent weeks, but that was not the case in the past two weeks where we saw some classic risk sentiment correlations. This means, apart from the regular focus on US10Y , we’ll also be paying close attention on any sharp moves in risk sentiment, especially going out of the FOMC meeting as that can play a big part in overall JPY volatility . Apart from that, eyes will also be on any jawboning from Japanese officials where the BoJ has placed the ball firmly in the MoF’s court to try and curb JPY depreciation.
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). The upcoming week has a new round of OPEC meetings where the cartel is once again expected to stick to their plans to up output by 430K BPD per month. It will be interesting though to see whether recent lockdowns in China, and possible oil embargo news from the EU impacts the OPEC discussions, if at all.
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 little change in CFTC data for the CAD. 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. As always though, timing those shorts will be very important.
5. The Week Ahead
The highlight for the week ahead will be the jobs data scheduled for Friday, as well as oil market developments and risk sentiment. On the jobs data, this will be an interesting test for the Canadian labour market which have held up really well after bouncing back from the Omicron hick up. Even though we think the growth outlook for Canada is too optimistic, it might be too early to start seeing those growth concerns trickle into the jobs market as it is usually a late cycle indicator. However, in the event of a miss or a beat it might not change much in terms for the BoC just yet but given the frothy CAD price action a surprise miss could kickstart some overdue downside. Even though the correlation to oil has been rather hit and miss over the past few weeks, it’s always important to keep oil developments in mind, which means next week’s OPEC+ meetings could be an important event for Petro-currencies, especially with the possibility of oil embargo news from the EU as well. Then we also have risk sentiment to watch as the classic risk sensitivity that one would usually expect from high beta currencies like the AUD, CAD and NZD have seemingly returned with a vengeance in the past two trading weeks. That means overall risk sentiment will be an important driver to keep in mind for the CAD as well.
JPY
FUNDAMENTAL BIAS: BEARISH
1. Monetary Policy
The BoJ kept all policy settings unchanged at their April meeting, which was in line with broad consensus expectations, but given the price action after the event did imply that a sizeable chunk of the market was expecting something more (us included). Due to the JPY weakness in recent weeks, markets wanted to see whether the bank would potentially increase their Yield Curve Control target band from 0.25%--0.25% to 0.50%--0.50%. But the bank decided to stick to their guns and maintain their ultra-easy policy despite the rapid depreciation of the JPY. The bank doubled down by saying they will conduct special open market operations on every working day as needed to keep the 10-year GBP capped at 0.25%. As expected, the bank reiterated their view that rates will stay low for the foreseeable future and won’t hesitate to add stimulus if the economy needs it. On the JPY, Gov Kuroda made familiar comments by saying they desire stable currency moves which reflect economic fundamentals. As a result of the bank’s inaction, all eyes will now be on the MoF to intervene if the rapid depreciation of the JPY continues.
2. Safe-haven status and overall risk outlook
As a safe-haven currency, the market's risk outlook is usually the primary driver. Economic data rarely proves market moving, and although monetary policy expectations can affect the JPY in the short-term, safe-haven flows are typically more dominant. Even though the market’s overall risk tone saw a huge recovery and risk-on frenzy from the middle of 2020 to the end of 2021, recent developments have increased risks. With central banks tightening policy into an economic slowdown, risk appetite is jittery. Even though that doesn’t change our med-term bias for the JPY, it does means we should expect more risk sentiment ebbs and flows this year, and the heightened volatility can create strong directional moves in the JPY, as long as yields play their part.
3. Low-yielding currency with inverse correlation to US10Y
As a low yielding currency, the JPY usually shares a strong inverse correlation to moves in US yield differentials. Like most correlations, the strength of the inverse correlation between the JPY and US10Y isn’t perfect and will ebb and flow depending on the market environment from both 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. In this environment there could be mild upside risks for the JPY if US10Y corrects, but we shouldn’t look at the yield correlation in isolation and also weigh it alongside risk sentiment and price action in other safe havens.
4. CFTC Analysis
Very chunky unwind in net-short in the recent CFTC update, but positioning is still very stretched with aggregate JPY positioning still close to 2 standard dev away from a 15-year mean. Even though the med-term outlook remains bearish , the risk to reward to chase the currency lower from here is not very attractive.
5. The Week Ahead
For the week ahead, the focus will remain on the key drivers which is US10Y and more recently risk sentiment. Given the move in yield differentials and commodity prices, the JPY had very little safe haven appeal over recent weeks, but that was not the case in the past two weeks where we saw some classic risk sentiment correlations. This means, apart from the regular focus on US10Y , we’ll also be paying close attention on any sharp moves in risk sentiment, especially going out of the FOMC meeting as that can play a big part in overall JPY volatility . Apart from that, eyes will also be on any jawboning from Japanese officials where the BoJ has placed the ball firmly in the MoF’s court to try and curb JPY depreciation.
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.