EUR
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
The ECB used the April meeting as a place holder meeting for the most part by not announcing any additional policy tweaks. The plans to phase out the APP into Q3 remained intact by reducing purchases from 40bln to 30bln in May and then down to 20bln in June. Markets were leaning towards a slightly more hawkish take from the bank (given recent inflation pressures), but the lack of conviction to remove the conditionality regarding the APP removal was seen as dovish. President Lagarde added to this dovish tone by explaining that Q3 has three months and IF the bank stops the APP, it could happen July, August or September. This was an important statement as the difference between a July and September end could mean the difference between a Q3 or Q4 rate hike. The president also added to the dovish tone by stressing that risks for the economic outlook are tilted to the downside and have recently intensified with geopolitical and virus-related challenges. When asked about policy normalization, the president made a strange comment by saying it is premature to think about monpol normalisation. As the bank is currently embarking on normalization this comment seemed out of place and reaffirmed the overall dovish take from the meeting. There were the usual sources releases after the presser which said policymakers see a July hike as still possible after Thursday's meeting, which provided some reprieve. With inflation >7% and growth slowing, the June meeting which accompanies staff economic projections will be critical for markets to solidify whether expectations of 1 or 2 hikes this year is correct or not.
2. Economic – Health – Geopolitics
Growth differentials still favour the US over EU capital flows, but differentials have turned positive and remain positive against the UK. Given growing stagflation fears the ECB is in a tough spot, being forced to normalize policy to try and combat inflation but could as a result further damage growth. Ongoing EU fiscal discussions to possibly allow ‘green bonds’ NOT to count against budget deficits remains in focus, alongside debt issuance for energy purchases. If approved, it will offer a flood of fiscal support which would be positive for the EUR and EU equities. Geopolitics remain a focus point as well given the ongoing war in Ukraine, but after the initial geopolitical scares but have been trying to carve out a base. Proximity to the war and the impact of sanctions remains a risk if the situation deteriorates. With lots of negatives already priced, chasing lows on bad news is not as attractive as chasing the EUR higher on good news.
3. CFTC Analysis
Another very bullish signal with all three major categories seeing another week of net-long weekly changes. It seems as if all three categories added longs at the worst possible time last week as the EUR failed to garner much upside momentum. With recent growth & inflation differentials turning in favour of the EUR we prefer trading the EUR higher on good news as opposed to chasing it lower on bad news right now.
CAD
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
In June the BoC delivered on market expectations by hiking rates by 50bps to 1.75% and kept its QT process intact. The statement-only decision was interpreted as more hawkish than expected with the bank saying it was ‘prepared to act more forcefully if needed’ to meet its inflation target. This saw markets implying either a few more additional 50bsp hikes or potentially opening the door to 75bsp hikes. The bank also delivered a hawkish tone regarding price pressures, noting that risks of elevated inflation becoming entrenched had risen and price pressures was persisting well above target. The biggest surprise was the lack of any real concern regarding growth. Instead, the bank was very optimistic about activity by noting it was strong and still operating above trend. The lack of concern about the clear slowdown in growth in their biggest trading partner, and the lack of concerns about debt levels and the housing market was a big surprise for us. Instead of sounding concerned about falling house prices and its possible effect on the economy, they welcomed the drop as a sign that their normalisation process is taking effect. To summarize, the bank remained much more hawkish than we anticipated and means our neutral bias for the CAD is taking a bit of a beating as CAD continues to trade at 9-year highs at the index level.
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
Positioning was more mixed last week for the CAD, but we continue to think that 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.
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
The ECB used the April meeting as a place holder meeting for the most part by not announcing any additional policy tweaks. The plans to phase out the APP into Q3 remained intact by reducing purchases from 40bln to 30bln in May and then down to 20bln in June. Markets were leaning towards a slightly more hawkish take from the bank (given recent inflation pressures), but the lack of conviction to remove the conditionality regarding the APP removal was seen as dovish. President Lagarde added to this dovish tone by explaining that Q3 has three months and IF the bank stops the APP, it could happen July, August or September. This was an important statement as the difference between a July and September end could mean the difference between a Q3 or Q4 rate hike. The president also added to the dovish tone by stressing that risks for the economic outlook are tilted to the downside and have recently intensified with geopolitical and virus-related challenges. When asked about policy normalization, the president made a strange comment by saying it is premature to think about monpol normalisation. As the bank is currently embarking on normalization this comment seemed out of place and reaffirmed the overall dovish take from the meeting. There were the usual sources releases after the presser which said policymakers see a July hike as still possible after Thursday's meeting, which provided some reprieve. With inflation >7% and growth slowing, the June meeting which accompanies staff economic projections will be critical for markets to solidify whether expectations of 1 or 2 hikes this year is correct or not.
2. Economic – Health – Geopolitics
Growth differentials still favour the US over EU capital flows, but differentials have turned positive and remain positive against the UK. Given growing stagflation fears the ECB is in a tough spot, being forced to normalize policy to try and combat inflation but could as a result further damage growth. Ongoing EU fiscal discussions to possibly allow ‘green bonds’ NOT to count against budget deficits remains in focus, alongside debt issuance for energy purchases. If approved, it will offer a flood of fiscal support which would be positive for the EUR and EU equities. Geopolitics remain a focus point as well given the ongoing war in Ukraine, but after the initial geopolitical scares but have been trying to carve out a base. Proximity to the war and the impact of sanctions remains a risk if the situation deteriorates. With lots of negatives already priced, chasing lows on bad news is not as attractive as chasing the EUR higher on good news.
3. CFTC Analysis
Another very bullish signal with all three major categories seeing another week of net-long weekly changes. It seems as if all three categories added longs at the worst possible time last week as the EUR failed to garner much upside momentum. With recent growth & inflation differentials turning in favour of the EUR we prefer trading the EUR higher on good news as opposed to chasing it lower on bad news right now.
CAD
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
In June the BoC delivered on market expectations by hiking rates by 50bps to 1.75% and kept its QT process intact. The statement-only decision was interpreted as more hawkish than expected with the bank saying it was ‘prepared to act more forcefully if needed’ to meet its inflation target. This saw markets implying either a few more additional 50bsp hikes or potentially opening the door to 75bsp hikes. The bank also delivered a hawkish tone regarding price pressures, noting that risks of elevated inflation becoming entrenched had risen and price pressures was persisting well above target. The biggest surprise was the lack of any real concern regarding growth. Instead, the bank was very optimistic about activity by noting it was strong and still operating above trend. The lack of concern about the clear slowdown in growth in their biggest trading partner, and the lack of concerns about debt levels and the housing market was a big surprise for us. Instead of sounding concerned about falling house prices and its possible effect on the economy, they welcomed the drop as a sign that their normalisation process is taking effect. To summarize, the bank remained much more hawkish than we anticipated and means our neutral bias for the CAD is taking a bit of a beating as CAD continues to trade at 9-year highs at the index level.
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
Positioning was more mixed last week for the CAD, but we continue to think that 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.
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.