CAD
FUNDAMENTAL OUTLOOK: NEUTRAL
The CAD has enjoyed far more upside in the past few weeks than we anticipated. We’ve been cautious on the currency given
Canada’s dependency on the US (>70% of exports) where the clear signs of a faster than expected slowdown in the US should
have deteriorated the growth outlook for Canada.
Apart from that, the risks to the Canadian housing market risks to negatively impact consumer spending as interest rates rise
higher at aggressive speed, potentially damaging the wealth effect created by the rapid rise in house prices since covid.
However, despite the risks to economy and the risks to the outlook, markets still price in a very favourable growth environment
for Canada, also supported by a big push higher in terms of trade due to the rise in commodity prices. Furthermore, despite
clear warning signals, the BoC has chosen to ignore the negatives and has stayed surprisingly positive and hawkish.
We’ve miss most of the move higher in the currency as we’ve been cautious in our bias, but the risks are still present and with
the currency at 9-year highs (at the index level) we have very little appetite for chasing it higher from here.
POSSIBLE HAWKISH SURPRISES
As an oil exporter, oil prices are important for CAD. Catalyst that sees further upside Oil (deteriorating supply outlook, ease in demand fears) could trigger bullish CAD reactions. The correlation has been hit and miss in recent weeks though. As a risk sensitive currency, and catalyst that causes big bouts of risk on sentiment could trigger bullish reactions in the CAD.
POSSIBLE DOVISH SURPRISES
As an oil exporter, oil prices are important for CAD. Catalyst that sees further upside Oil (deteriorating supply outlook, ease
in demand fears) could trigger bullish CAD reactions. The correlation has been hit and miss in recent weeks though. As a risk sensitive currency, and catalyst that causes big bouts of risk off sentiment could trigger bearish reactions in the CAD.
Since a lot of policy tightening has been priced into STIR markets, any negative catalysts that triggers less hawkish BoC expectations (faster deceleration in growth or inflation ) could trigger outsized downside for the CAD.
BIGGER PICTURE
The bigger picture outlook for the CAD remains neutral for now. Given the clear risks to the growth outlook due to the slowdown
in the US, as well as rising risks to the consumer and the housing market, we remain cautious on the currency, even though it’s
move much higher than we anticipated. With a lot of upside priced into the CAD and Canadian yields, our preferred way of
trading the CAD would be to look for short-term negative catalysts to trade the CAD lower instead of chasing it higher.
JPY
FUNDAMENTAL OUTLOOK: BEARISH
The Yen has fallen off the proverbial cliff over the past few months, driven by very negative fundamentals. Yield differentials has
by far had the biggest negative impact . With other major central banks starting aggressive hiking cycles, it has lifted yields quite
dramatically, compared to the BoJ which has stubbornly kept their yields capped through continued Yield Curve Control. The
inverse correlation to US10Y is usually important but has taken centre stage in recent months as the biggest driver of the JPY.
Even though the JPY is considered a safe haven, the inflows has been more limited compared to other cycles. The main reason
for that is that the bank’s current account surplus (a main reason for safe haven appeal) has deteriorated and expected to
continue to deteriorate due to the rise in commodity prices. Japan imports over 90% of their energy commodities , so the
continued rise in oil prices has added to the downside and also eroded some of the classic safe haven appeal.
Monetary policy is the other negative driver. Despite inflation starting to push higher in Japan, and despite the lessons from
other central banks now struggling with inflation last seen since the 70’s, and despite the market’s relentless attempts at testing
the JGB 10-year yield cap at 0.25%, the bank has stayed stubbornly dovish. At this stage the bank is playing a very dangerous
game by allowing the JPY to weaken, further adding to inflationary risks. Their dovish persistence remains a negative for the JPY.
The BoJ and MoF’s reluctance to intervene to stop the rapid and violent depreciation in the JPY has been noticeable. As long as
they just voice their dislike but fail to act and actually do something, the market will keep testing them and shorting the JPY.
POSSIBLE HAWKISH SURPRISES
Any catalysts that trigger meaningful downside in US10Y (less hawkish Fed, faster deceleration in US CPI , faster deceleration
in US growth) or triggers meaningful bouts of risk off sentiment could trigger bullish reactions from the JPY. Any catalyst that triggers meaningful downside in key commodities like Oil (deteriorating demand outlook, ease in supply shortage) could trigger bullish JPY reactions. Monetary policy is stubbornly dovish. Any catalyst that triggers speculation that the BoJ would drop YCC or hike rates or both (big upside surprises in inflation ) could trigger a big recovery in the JPY, especially with stretched short positioning. Any intervention from the BoJ or MoF to stop JPY depreciation (buying the JPY or giving firm and clear lines in the sand for USDJPY ) could offer decent reprieve for the JPY.
POSSIBLE DOVISH SURPRISES
With yield differentials playing such a huge role for the JPY, any catalysts that push US10Y higher (more aggressive Fed, further
acceleration in US CPI , better-than-expected US growth data) could trigger further bearish price action for the JPY. Any catalyst that creates further upside in oil prices (further supply concerns, geopolitical tensions) poses downside risks for Japan’s current account surplus and could trigger further bearish reactions in the JPY. Further reluctance from the BoJ and MoF to address the concerning depreciation in the JPY is a continued negative driver for the JPY to keep on the radar.
BIGGER PICTURE
The bigger picture looks bleak for the JPY right now, and as long as US10Y gain ground and as long as the BoJ stays unnecessarily
dovish and as long as the BoJ and MoF does nothing to address JPY weakness, the bias remains lower. However, given stretched
tactical and CFTC positioning, and given growth concerns in the US, we don’t want to chase the JPY lower from here.
FUNDAMENTAL OUTLOOK: NEUTRAL
The CAD has enjoyed far more upside in the past few weeks than we anticipated. We’ve been cautious on the currency given
Canada’s dependency on the US (>70% of exports) where the clear signs of a faster than expected slowdown in the US should
have deteriorated the growth outlook for Canada.
Apart from that, the risks to the Canadian housing market risks to negatively impact consumer spending as interest rates rise
higher at aggressive speed, potentially damaging the wealth effect created by the rapid rise in house prices since covid.
However, despite the risks to economy and the risks to the outlook, markets still price in a very favourable growth environment
for Canada, also supported by a big push higher in terms of trade due to the rise in commodity prices. Furthermore, despite
clear warning signals, the BoC has chosen to ignore the negatives and has stayed surprisingly positive and hawkish.
We’ve miss most of the move higher in the currency as we’ve been cautious in our bias, but the risks are still present and with
the currency at 9-year highs (at the index level) we have very little appetite for chasing it higher from here.
POSSIBLE HAWKISH SURPRISES
As an oil exporter, oil prices are important for CAD. Catalyst that sees further upside Oil (deteriorating supply outlook, ease in demand fears) could trigger bullish CAD reactions. The correlation has been hit and miss in recent weeks though. As a risk sensitive currency, and catalyst that causes big bouts of risk on sentiment could trigger bullish reactions in the CAD.
POSSIBLE DOVISH SURPRISES
As an oil exporter, oil prices are important for CAD. Catalyst that sees further upside Oil (deteriorating supply outlook, ease
in demand fears) could trigger bullish CAD reactions. The correlation has been hit and miss in recent weeks though. As a risk sensitive currency, and catalyst that causes big bouts of risk off sentiment could trigger bearish reactions in the CAD.
Since a lot of policy tightening has been priced into STIR markets, any negative catalysts that triggers less hawkish BoC expectations (faster deceleration in growth or inflation ) could trigger outsized downside for the CAD.
BIGGER PICTURE
The bigger picture outlook for the CAD remains neutral for now. Given the clear risks to the growth outlook due to the slowdown
in the US, as well as rising risks to the consumer and the housing market, we remain cautious on the currency, even though it’s
move much higher than we anticipated. With a lot of upside priced into the CAD and Canadian yields, our preferred way of
trading the CAD would be to look for short-term negative catalysts to trade the CAD lower instead of chasing it higher.
JPY
FUNDAMENTAL OUTLOOK: BEARISH
The Yen has fallen off the proverbial cliff over the past few months, driven by very negative fundamentals. Yield differentials has
by far had the biggest negative impact . With other major central banks starting aggressive hiking cycles, it has lifted yields quite
dramatically, compared to the BoJ which has stubbornly kept their yields capped through continued Yield Curve Control. The
inverse correlation to US10Y is usually important but has taken centre stage in recent months as the biggest driver of the JPY.
Even though the JPY is considered a safe haven, the inflows has been more limited compared to other cycles. The main reason
for that is that the bank’s current account surplus (a main reason for safe haven appeal) has deteriorated and expected to
continue to deteriorate due to the rise in commodity prices. Japan imports over 90% of their energy commodities , so the
continued rise in oil prices has added to the downside and also eroded some of the classic safe haven appeal.
Monetary policy is the other negative driver. Despite inflation starting to push higher in Japan, and despite the lessons from
other central banks now struggling with inflation last seen since the 70’s, and despite the market’s relentless attempts at testing
the JGB 10-year yield cap at 0.25%, the bank has stayed stubbornly dovish. At this stage the bank is playing a very dangerous
game by allowing the JPY to weaken, further adding to inflationary risks. Their dovish persistence remains a negative for the JPY.
The BoJ and MoF’s reluctance to intervene to stop the rapid and violent depreciation in the JPY has been noticeable. As long as
they just voice their dislike but fail to act and actually do something, the market will keep testing them and shorting the JPY.
POSSIBLE HAWKISH SURPRISES
Any catalysts that trigger meaningful downside in US10Y (less hawkish Fed, faster deceleration in US CPI , faster deceleration
in US growth) or triggers meaningful bouts of risk off sentiment could trigger bullish reactions from the JPY. Any catalyst that triggers meaningful downside in key commodities like Oil (deteriorating demand outlook, ease in supply shortage) could trigger bullish JPY reactions. Monetary policy is stubbornly dovish. Any catalyst that triggers speculation that the BoJ would drop YCC or hike rates or both (big upside surprises in inflation ) could trigger a big recovery in the JPY, especially with stretched short positioning. Any intervention from the BoJ or MoF to stop JPY depreciation (buying the JPY or giving firm and clear lines in the sand for USDJPY ) could offer decent reprieve for the JPY.
POSSIBLE DOVISH SURPRISES
With yield differentials playing such a huge role for the JPY, any catalysts that push US10Y higher (more aggressive Fed, further
acceleration in US CPI , better-than-expected US growth data) could trigger further bearish price action for the JPY. Any catalyst that creates further upside in oil prices (further supply concerns, geopolitical tensions) poses downside risks for Japan’s current account surplus and could trigger further bearish reactions in the JPY. Further reluctance from the BoJ and MoF to address the concerning depreciation in the JPY is a continued negative driver for the JPY to keep on the radar.
BIGGER PICTURE
The bigger picture looks bleak for the JPY right now, and as long as US10Y gain ground and as long as the BoJ stays unnecessarily
dovish and as long as the BoJ and MoF does nothing to address JPY weakness, the bias remains lower. However, given stretched
tactical and CFTC positioning, and given growth concerns in the US, we don’t want to chase the JPY lower from here.
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.