EUR
FUNDAMENTAL OUTLOOK: NEUTRAL
The EUR has had a bumpy ride over the past few months. At the onset of the war in Ukraine the EUR tumbled across the board.
However, in recent weeks, the persistently high inflation has seen the Governing Council take a more hawkish turn. At their June
meeting the bank confirmed that a 25bsp hike for July, but also kept the door open for 50bsp hikes from September onward.
Despite this hawkish tilt from the bank, and despite bund yields pushing up into fresh cycle highs, the EUR struggled to gain any
real momentum after the meeting. For some this was a sign that the market had already priced in too much hawkishness for the
ECB. This seems a bit unlikely though as the bank faces more energy price risk compared to the US and is at a greater risk of
needing to tilt even more aggressive in months ahead.
One reason for the downside is due to the market’s worries about fragmentation with spreads like the BTP/Bund spread jolting
higher as higher interest rates increases the default risk of highly indebted countries like Italy. Even though hawkish policy opens
up room for upside, the spread fragmentation and USD strength means there is two-way drivers for the EUR.
POSSIBLE HAWKISH SURPRISES
The customary post-ECB sources revealed some GC hawkish were still not satisfied despite a hawkish tilt. Any ECB comments that signal even more aggressive policy could trigger bullish reactions for the EUR. Geopolitics remains a focus for the EUR, where any possible de-escalation or cease fire in the Ukraine war would open up a lot of appreciation for the EUR. Stagflation fears are high right now for the Eurozone, with growth expected to slow while inflation stays persistently high. However, a lot of bad news has already been priced in for the EUR, which means any materially better-than-expected growth data could spark some upside for the single currency. The EUR has a 57% weighting in the DXY, which means any big fluctuations in the USD can impact the EUR quite a bit. Thus, this week’s upcoming FOMC could offer some reprieve for the EUR if the Fed is not able to surprise on the hawkish side.
POSSIBLE DOVISH SURPRISES
One caveat with incoming ECB comments is that hawkish comments can also counterintuitively pose downside risk. With markets quite concerned about spread fragmentation, hawkish comments that trigger further upside in BTP/Bund spreads could trigger bearish reactions in the EUR. Just like the EUR’s weighting in the DXY is an upside risk for the currency, the weighting is also a potential downside risk. With US headline CPI reaching 8.6% there is a risk that the Fed surprises markets with a 75bsp hike at the upcoming meeting. Any outsized upside in the USD as a result of that is expected to weigh on the EUR, potentially more than other majors.
BIGGER PICTURE
The fundamental outlook for the EUR remains neutral right now as we have positive and negative forces impacting the currency,
we have geopolitics, stagflation and spread fragmentation being negative inputs and we have more hawkish ECB policy and less
bad than expected recent growth data as supportive drivers. Thus, the best course of action with the EUR right now is taking
short-term plays which are driven by clear short-term bearish of bullish catalysts.
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.
FUNDAMENTAL OUTLOOK: NEUTRAL
The EUR has had a bumpy ride over the past few months. At the onset of the war in Ukraine the EUR tumbled across the board.
However, in recent weeks, the persistently high inflation has seen the Governing Council take a more hawkish turn. At their June
meeting the bank confirmed that a 25bsp hike for July, but also kept the door open for 50bsp hikes from September onward.
Despite this hawkish tilt from the bank, and despite bund yields pushing up into fresh cycle highs, the EUR struggled to gain any
real momentum after the meeting. For some this was a sign that the market had already priced in too much hawkishness for the
ECB. This seems a bit unlikely though as the bank faces more energy price risk compared to the US and is at a greater risk of
needing to tilt even more aggressive in months ahead.
One reason for the downside is due to the market’s worries about fragmentation with spreads like the BTP/Bund spread jolting
higher as higher interest rates increases the default risk of highly indebted countries like Italy. Even though hawkish policy opens
up room for upside, the spread fragmentation and USD strength means there is two-way drivers for the EUR.
POSSIBLE HAWKISH SURPRISES
The customary post-ECB sources revealed some GC hawkish were still not satisfied despite a hawkish tilt. Any ECB comments that signal even more aggressive policy could trigger bullish reactions for the EUR. Geopolitics remains a focus for the EUR, where any possible de-escalation or cease fire in the Ukraine war would open up a lot of appreciation for the EUR. Stagflation fears are high right now for the Eurozone, with growth expected to slow while inflation stays persistently high. However, a lot of bad news has already been priced in for the EUR, which means any materially better-than-expected growth data could spark some upside for the single currency. The EUR has a 57% weighting in the DXY, which means any big fluctuations in the USD can impact the EUR quite a bit. Thus, this week’s upcoming FOMC could offer some reprieve for the EUR if the Fed is not able to surprise on the hawkish side.
POSSIBLE DOVISH SURPRISES
One caveat with incoming ECB comments is that hawkish comments can also counterintuitively pose downside risk. With markets quite concerned about spread fragmentation, hawkish comments that trigger further upside in BTP/Bund spreads could trigger bearish reactions in the EUR. Just like the EUR’s weighting in the DXY is an upside risk for the currency, the weighting is also a potential downside risk. With US headline CPI reaching 8.6% there is a risk that the Fed surprises markets with a 75bsp hike at the upcoming meeting. Any outsized upside in the USD as a result of that is expected to weigh on the EUR, potentially more than other majors.
BIGGER PICTURE
The fundamental outlook for the EUR remains neutral right now as we have positive and negative forces impacting the currency,
we have geopolitics, stagflation and spread fragmentation being negative inputs and we have more hawkish ECB policy and less
bad than expected recent growth data as supportive drivers. Thus, the best course of action with the EUR right now is taking
short-term plays which are driven by clear short-term bearish of bullish catalysts.
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.
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.