EUR
FUNDAMENTAL OUTLOOK: WEAK BEARISH
BASELINE
In recent weeks, the persistently high inflation has seen the ECB take a more hawkish turn with the bank hiking rates by 50bsp at their July meeting. Additional pressure on inflation from gas supply shortages and Rhine River levels in Germany means the ECB will be forced to continue hiking rates. But the bank quelled any hawkish excitement at their July meeting by explaining they are frontloading hikes and not signalling a higher terminal rate with their bigger than expected July hike. The bank also failed to ease spread fragmentation concerns with their new Transmission Protection Instrument (TPI) as the eligibility criteria means countries like Italy and Spain that will need the support the most might have a tough time qualifying. Combined with political concerns and additional inflation pressures, further spread widening looks likely for now. Right now, even though policy and spreads are important, the main story and driver for the EUR is the economic outlook. Recent growth data continues to surprise to the downside at a rapid pace and further stoking recession fears for the Eurozone. Even though the bias remains lower, a lot of negatives have been priced in from a tactical point of view so worth keeping that in mind.
POSSIBLE BULLISH SURPRISES
De-escalation or cease fire in Ukraine would open up a lot of EUR upside. Also keep Italian politics in mind where successful attempts to avoid a snap election could ease spread widening & support the EUR. Stagflation risks remains high and recent data has invigorated recession fears, but with lots of bad news priced any materially better-than-expected growth data could spark some relief. Spread fragmentation remains a concern, especially with Italian politics and the ECB’s failed attempt to reassure markets. Any TPI comments that convinces markets it can solve fragmentation issues should be supportive for the EUR. Energy supply is also in focus, which means watching gas flows from Russia. If Russia increases gas flows to more regular levels it should ease some supply concerns and see EUR upside. Rhine river concerns are one to watch, any good news on water levels and resumption of normal transport could be a bullish catalyst for the EUR.
POSSIBLE BEARISH SURPRISES
Any escalation in the Ukraine war that risks including NATO would be big negative risks. Also keep Italian politics in mind, where any failed attempts to avoid a snap election should add further pressure on the EUR. Recent data has invigorated recession fears. Even though lots of bad news is priced, any materially worse-than-expected growth data could spark further downside some relief. Spread fragmentation remains in focus, and if the ECB fails to act when we see big jolts higher in the BTP/ Bund spread, or if any TPI comment further concern markets about its effectiveness, it could trigger bearish reactions in the EUR. Energy supply is also in focus, which means watching gas flows from Russia. If Russia decreases gas flows even further, it should increase supply concerns and see EUR downside. Rhine river concerns are one to watch, any bad news on water levels and continued breakdown in transportation could be a bearish catalyst for the EUR.
BIGGER PICTURE
The fundamental outlook remains bearish with recent leading indicators pointing to a much faster economic slowdown than markets had previously expected. The current bearish drivers (geopolitics, stagflation, spread fragmentation, energy supply concerns) far outweigh the positives from a hawkish ECB. Recession risks have opened up a narrative change for the EUR which have seen markets adjust forecasts to reflect higher recession probabilities that continues to weigh on the EUR. With lots of bad news priced in there is risks in chasing the EUR lower, but the fundamental outlook remains bleak.
CAD
FUNDAMENTAL OUTLOOK: NEUTRAL
BASELINE
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 and possible recession should deteriorate the growth outlook for Canada. Apart from that, the risks to the Canadian housing market can 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 the economy and 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 hawkish, hiking 1.0% in July. The market’s reaction after the 1.0% was quite telling though, with the CAD pushing lower afterwards. This suggests that those players that were long could’ve used the hike as a spot to take profit, or it could be the market pricing in a possible pause for the BoC in the months ahead because hiking so aggressive now means reaching a level to pause their cycle much faster. Either way, we remain cautious on the CAD and favour short-term catalysts that provide us with shorting opportunities.
POSSIBLE BULLISH SURPRISES
As an oil exporter, oil prices are important for CAD. Catalysts that see further upside in 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. Even though lots of tightening has been priced for the BoC, any overly hawkish comments from the BoC or big upside surprises in econ data could trigger short-term upside, but with a 100bsp providing no upside, risks are titled to the downside.
POSSIBLE BEARISH SURPRISES
As an oil exporter, oil prices are important for CAD. Any catalyst that triggers meaningful downside in oil (deteriorating demand outlook, ease in supply shortage, less supply constraints) could be a negative catalyst for the CAD as well. As a risk sensitive currency, and catalyst that causes big bouts of risk off sentiment could trigger bearish reactions in the CAD. With a lot of tightening priced into STIRs, and a 100bsp hike providing no support for the CAD, we think risks are skewed lower, and any big downside surprises in econ data could offer decent shorting opportunities 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, and potential negative impact for commodities like oil, we remain cautious on the currency (even though it’s moved much higher than we anticipated from the start of the year). With a lot of good news priced in, our preferred way of trading the CAD is lower on clear short-term negative catalysts.
FUNDAMENTAL OUTLOOK: WEAK BEARISH
BASELINE
In recent weeks, the persistently high inflation has seen the ECB take a more hawkish turn with the bank hiking rates by 50bsp at their July meeting. Additional pressure on inflation from gas supply shortages and Rhine River levels in Germany means the ECB will be forced to continue hiking rates. But the bank quelled any hawkish excitement at their July meeting by explaining they are frontloading hikes and not signalling a higher terminal rate with their bigger than expected July hike. The bank also failed to ease spread fragmentation concerns with their new Transmission Protection Instrument (TPI) as the eligibility criteria means countries like Italy and Spain that will need the support the most might have a tough time qualifying. Combined with political concerns and additional inflation pressures, further spread widening looks likely for now. Right now, even though policy and spreads are important, the main story and driver for the EUR is the economic outlook. Recent growth data continues to surprise to the downside at a rapid pace and further stoking recession fears for the Eurozone. Even though the bias remains lower, a lot of negatives have been priced in from a tactical point of view so worth keeping that in mind.
POSSIBLE BULLISH SURPRISES
De-escalation or cease fire in Ukraine would open up a lot of EUR upside. Also keep Italian politics in mind where successful attempts to avoid a snap election could ease spread widening & support the EUR. Stagflation risks remains high and recent data has invigorated recession fears, but with lots of bad news priced any materially better-than-expected growth data could spark some relief. Spread fragmentation remains a concern, especially with Italian politics and the ECB’s failed attempt to reassure markets. Any TPI comments that convinces markets it can solve fragmentation issues should be supportive for the EUR. Energy supply is also in focus, which means watching gas flows from Russia. If Russia increases gas flows to more regular levels it should ease some supply concerns and see EUR upside. Rhine river concerns are one to watch, any good news on water levels and resumption of normal transport could be a bullish catalyst for the EUR.
POSSIBLE BEARISH SURPRISES
Any escalation in the Ukraine war that risks including NATO would be big negative risks. Also keep Italian politics in mind, where any failed attempts to avoid a snap election should add further pressure on the EUR. Recent data has invigorated recession fears. Even though lots of bad news is priced, any materially worse-than-expected growth data could spark further downside some relief. Spread fragmentation remains in focus, and if the ECB fails to act when we see big jolts higher in the BTP/ Bund spread, or if any TPI comment further concern markets about its effectiveness, it could trigger bearish reactions in the EUR. Energy supply is also in focus, which means watching gas flows from Russia. If Russia decreases gas flows even further, it should increase supply concerns and see EUR downside. Rhine river concerns are one to watch, any bad news on water levels and continued breakdown in transportation could be a bearish catalyst for the EUR.
BIGGER PICTURE
The fundamental outlook remains bearish with recent leading indicators pointing to a much faster economic slowdown than markets had previously expected. The current bearish drivers (geopolitics, stagflation, spread fragmentation, energy supply concerns) far outweigh the positives from a hawkish ECB. Recession risks have opened up a narrative change for the EUR which have seen markets adjust forecasts to reflect higher recession probabilities that continues to weigh on the EUR. With lots of bad news priced in there is risks in chasing the EUR lower, but the fundamental outlook remains bleak.
CAD
FUNDAMENTAL OUTLOOK: NEUTRAL
BASELINE
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 and possible recession should deteriorate the growth outlook for Canada. Apart from that, the risks to the Canadian housing market can 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 the economy and 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 hawkish, hiking 1.0% in July. The market’s reaction after the 1.0% was quite telling though, with the CAD pushing lower afterwards. This suggests that those players that were long could’ve used the hike as a spot to take profit, or it could be the market pricing in a possible pause for the BoC in the months ahead because hiking so aggressive now means reaching a level to pause their cycle much faster. Either way, we remain cautious on the CAD and favour short-term catalysts that provide us with shorting opportunities.
POSSIBLE BULLISH SURPRISES
As an oil exporter, oil prices are important for CAD. Catalysts that see further upside in 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. Even though lots of tightening has been priced for the BoC, any overly hawkish comments from the BoC or big upside surprises in econ data could trigger short-term upside, but with a 100bsp providing no upside, risks are titled to the downside.
POSSIBLE BEARISH SURPRISES
As an oil exporter, oil prices are important for CAD. Any catalyst that triggers meaningful downside in oil (deteriorating demand outlook, ease in supply shortage, less supply constraints) could be a negative catalyst for the CAD as well. As a risk sensitive currency, and catalyst that causes big bouts of risk off sentiment could trigger bearish reactions in the CAD. With a lot of tightening priced into STIRs, and a 100bsp hike providing no support for the CAD, we think risks are skewed lower, and any big downside surprises in econ data could offer decent shorting opportunities 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, and potential negative impact for commodities like oil, we remain cautious on the currency (even though it’s moved much higher than we anticipated from the start of the year). With a lot of good news priced in, our preferred way of trading the CAD is lower on clear short-term negative catalysts.
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.