EUR
FUNDAMENTAL OUTLOOK: NEUTRAL
BASELINE
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 ECB take a more hawkish turn with the bank confirming at least a 25bsp hike for July and possibility of a 50bsp hikes in September. Despite the hawkish policy shift, the concerns over fragmentation in bond spreads like the BTP\Bund spread as well as fears of growing stagflation risks has seen the EUR struggled to hold onto any real momentum. The ECB did try to comfort spread concerns this past week with an ad-hoc meeting and decided to use PEPP reinvestments as a way to calm fragmentation. This was not enough to calm concerns though as reinvestment would amount to only 20 billion Euros per month. However, the bank’s decision was enough to push the BTP\Bund down 50bsp, and if that trend continues lower should be supportive for the EUR. The bank did back up their attempts at calming fragmentation fears after their ad-hoc meeting by saying they are looking at introducing an additional ‘tool’ as quick as possible, so markets will be focused on any insights into what that might be.
POSSIBLE BULLISH SURPRISES
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. ECB Lagarde testifies before the EU’s Committee on Economic and Monetary Affairs this upcoming week. If Lagarde talks up even more aggressive policy or offers enough conviction that they will handle any spikes in BTP\Bund spreads could trigger some bullish reactions in the EUR.
POSSIBLE BEARISH SURPRISES
Fragmentation risks in spreads will remain a hot topic next week, and if ECB’s Lagarde fails to calm market’s fears or if she walks back on some of the hawkish takes for rates following their recent meeting (to help spreads) it 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. Any potential catalysts that spark short-term upside in the Dollar (upside in yields, risk off sentiment, very hawkish rhetoric from Fed officials) can trigger upside in the USD and weigh on EUR. As growth is a concern in the Eurozone the incoming flash PMIs will be watched closely, and any bigger-than-expected contraction in PMIs could trigger bearish reactions in the EUR.
BIGGER PICTURE
The fundamental outlook for the EUR remains neutral right now as we have positive and negative forces impacting the currency. On the negative side we have geopolitics, stagflation and spread fragmentation acting as negative drivers. But we also have hawkish ECB policy and better-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 or bullish catalysts.
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 optimistic and hawkish. We’ve missed most of the move higher in the CAD as our bias has kept us cautious, but the risks are still present and with the currency close to 9-year highs (at the index level) we have very little appetite for chasing it higher from here and will be actively looking for opportunities to trade the CAD lower with the right type of bearish catalyst.
POSSIBLE BULLISH 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. With more market participants noticing cracks in the housing markets, a very solid House Price Index print could ease some of those concerns and provide some upside. Even though a lot of tightening has been priced in for the BoC , a big enough surprise in CPI that triggers further hike expectations could provide some short-term support.
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. 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. In recent communication, Governor Macklem started to mention some hiccups in housing. A big miss in the House Price index could trigger more speculation of a less hawkish bank and could trigger some 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
BASELINE
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 ECB take a more hawkish turn with the bank confirming at least a 25bsp hike for July and possibility of a 50bsp hikes in September. Despite the hawkish policy shift, the concerns over fragmentation in bond spreads like the BTP\Bund spread as well as fears of growing stagflation risks has seen the EUR struggled to hold onto any real momentum. The ECB did try to comfort spread concerns this past week with an ad-hoc meeting and decided to use PEPP reinvestments as a way to calm fragmentation. This was not enough to calm concerns though as reinvestment would amount to only 20 billion Euros per month. However, the bank’s decision was enough to push the BTP\Bund down 50bsp, and if that trend continues lower should be supportive for the EUR. The bank did back up their attempts at calming fragmentation fears after their ad-hoc meeting by saying they are looking at introducing an additional ‘tool’ as quick as possible, so markets will be focused on any insights into what that might be.
POSSIBLE BULLISH SURPRISES
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. ECB Lagarde testifies before the EU’s Committee on Economic and Monetary Affairs this upcoming week. If Lagarde talks up even more aggressive policy or offers enough conviction that they will handle any spikes in BTP\Bund spreads could trigger some bullish reactions in the EUR.
POSSIBLE BEARISH SURPRISES
Fragmentation risks in spreads will remain a hot topic next week, and if ECB’s Lagarde fails to calm market’s fears or if she walks back on some of the hawkish takes for rates following their recent meeting (to help spreads) it 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. Any potential catalysts that spark short-term upside in the Dollar (upside in yields, risk off sentiment, very hawkish rhetoric from Fed officials) can trigger upside in the USD and weigh on EUR. As growth is a concern in the Eurozone the incoming flash PMIs will be watched closely, and any bigger-than-expected contraction in PMIs could trigger bearish reactions in the EUR.
BIGGER PICTURE
The fundamental outlook for the EUR remains neutral right now as we have positive and negative forces impacting the currency. On the negative side we have geopolitics, stagflation and spread fragmentation acting as negative drivers. But we also have hawkish ECB policy and better-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 or bullish catalysts.
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 optimistic and hawkish. We’ve missed most of the move higher in the CAD as our bias has kept us cautious, but the risks are still present and with the currency close to 9-year highs (at the index level) we have very little appetite for chasing it higher from here and will be actively looking for opportunities to trade the CAD lower with the right type of bearish catalyst.
POSSIBLE BULLISH 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. With more market participants noticing cracks in the housing markets, a very solid House Price Index print could ease some of those concerns and provide some upside. Even though a lot of tightening has been priced in for the BoC , a big enough surprise in CPI that triggers further hike expectations could provide some short-term support.
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. 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. In recent communication, Governor Macklem started to mention some hiccups in housing. A big miss in the House Price index could trigger more speculation of a less hawkish bank and could trigger some 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.