AUD
FUNDAMENTAL OUTLOOK: WEAK BULLISH
BASELINE
Despite a decent recovery from the start of the year, the AUD has struggled in the midst underlying negative risk sentiment, China’s continued struggles with Covid breakouts, and more recently the big slump in key commodities (Iron Ore & Coal). China’s economy is always a key focus for the AUD. While all major economies are expected to slow in 2022, China is expected to recover (monetary and fiscal policy very stimulative). The expected recovery is a key input for our bullish AUD bias. China’s recovery and planned infrastructure spending should support Australia’s terms of trade due to key commodity exports like Iron Ore, Coal and LNG . However, the expected recovery in China has not been enough to keep key Australian commodity prices supported, and the big flush lower in those markets saw chunky downside for the AUD in the past week. The RBA that has finally starting their hiking cycle (fairly aggressively as well) should be supportive for the AUD, but as markets were well prepared for the RBA’s departure from their unnecessary dovish stance the pivot has not been very supportive. The short-term problem to the current bullish bias for the AUD is further virus concerns in China and further drops in commodities . As long as the covid situation stays bleak, and commodities continue to fall, the AUD might struggle to take advantage of positive drivers and makes it more sensitive to underlying risk sentiment.
POSSIBLE BULLISH SURPRISES
Positive Covid developments in China (easing restrictions, more fiscal or monetary stimulus, or letting go of the covidzero policy) could trigger bullish reactions in the AUD. As a risk sensitive currency, catalysts that causes big bouts of risk on sentiment could trigger bullish reactions in the AUD. With the RBA just getting started with their hiking cycle, there is scope for them to turn more aggressive, which means any overly hawkish comments or actions from them in the week ahead could trigger some bullish reactions. Any catalyst that triggers some recovery in Australia’s key commodity exports (China stimulus, lifting covid restrictions, new infrastructure projects in China, higher inflation fears) should be supportive for the AUD.
POSSIBLE BEARISH SURPRISES
Negative Covid developments in China (increasing restrictions or adding new ones) could trigger bearish reactions in the AUD. As a risk sensitive currency, catalysts that causes big bouts of risk off sentiment could trigger bearish reactions in the AUD. Any catalyst that triggers more downside in Australia’s key commodity exports (additional China restrictions, demand destruction fears, and additional news on recent centralized iron ore buyers) could be negative for the AUD. The RBA has just started their new hiking cycle, and we’ve recently already heard the same stubbornly dovish comments from the likes of Gov Lowe pushing back against aggressive tightening. Thus, any overly dovish comments from them in the week ahead can trigger bearish reactions in the AUD.
BIGGER PICTURE
The bigger picture outlook for the AUD remains positive for now, but that is largely dependent on what happens to China and whether key commodities like Iron Ore and Coal can stop their recent bleeding. Until the covid situation improves materially and until commodities stabilize, the AUD might struggle to maintain upside short-term momentum.
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 are looking for opportunities to trade it lower on bearish catalyst.
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. With more market participants noticing cracks in the housing markets, a less dramatic decline in house prices could ease some of those concerns and provide some upside. Even though lots of tightening has been priced for the BoC , big enough upside surprise in CPI or incoming jobs data (showing the jobs market is holding up good) that triggers further hike expectations could provide some short-term upside.
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, inflation or jobs) could trigger outsized downside for the CAD. In recent communication, Governor Macklem started to mention some hiccups in housing. Big downside surprises in house prices could trigger speculation of a less hawkish bank and trigger 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 moved much higher than we anticipated. With a lot of good news priced in for the CAD and yields, our preferred way of trading the CAD is lower on short-term negative catalysts.
FUNDAMENTAL OUTLOOK: WEAK BULLISH
BASELINE
Despite a decent recovery from the start of the year, the AUD has struggled in the midst underlying negative risk sentiment, China’s continued struggles with Covid breakouts, and more recently the big slump in key commodities (Iron Ore & Coal). China’s economy is always a key focus for the AUD. While all major economies are expected to slow in 2022, China is expected to recover (monetary and fiscal policy very stimulative). The expected recovery is a key input for our bullish AUD bias. China’s recovery and planned infrastructure spending should support Australia’s terms of trade due to key commodity exports like Iron Ore, Coal and LNG . However, the expected recovery in China has not been enough to keep key Australian commodity prices supported, and the big flush lower in those markets saw chunky downside for the AUD in the past week. The RBA that has finally starting their hiking cycle (fairly aggressively as well) should be supportive for the AUD, but as markets were well prepared for the RBA’s departure from their unnecessary dovish stance the pivot has not been very supportive. The short-term problem to the current bullish bias for the AUD is further virus concerns in China and further drops in commodities . As long as the covid situation stays bleak, and commodities continue to fall, the AUD might struggle to take advantage of positive drivers and makes it more sensitive to underlying risk sentiment.
POSSIBLE BULLISH SURPRISES
Positive Covid developments in China (easing restrictions, more fiscal or monetary stimulus, or letting go of the covidzero policy) could trigger bullish reactions in the AUD. As a risk sensitive currency, catalysts that causes big bouts of risk on sentiment could trigger bullish reactions in the AUD. With the RBA just getting started with their hiking cycle, there is scope for them to turn more aggressive, which means any overly hawkish comments or actions from them in the week ahead could trigger some bullish reactions. Any catalyst that triggers some recovery in Australia’s key commodity exports (China stimulus, lifting covid restrictions, new infrastructure projects in China, higher inflation fears) should be supportive for the AUD.
POSSIBLE BEARISH SURPRISES
Negative Covid developments in China (increasing restrictions or adding new ones) could trigger bearish reactions in the AUD. As a risk sensitive currency, catalysts that causes big bouts of risk off sentiment could trigger bearish reactions in the AUD. Any catalyst that triggers more downside in Australia’s key commodity exports (additional China restrictions, demand destruction fears, and additional news on recent centralized iron ore buyers) could be negative for the AUD. The RBA has just started their new hiking cycle, and we’ve recently already heard the same stubbornly dovish comments from the likes of Gov Lowe pushing back against aggressive tightening. Thus, any overly dovish comments from them in the week ahead can trigger bearish reactions in the AUD.
BIGGER PICTURE
The bigger picture outlook for the AUD remains positive for now, but that is largely dependent on what happens to China and whether key commodities like Iron Ore and Coal can stop their recent bleeding. Until the covid situation improves materially and until commodities stabilize, the AUD might struggle to maintain upside short-term momentum.
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 are looking for opportunities to trade it lower on bearish catalyst.
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. With more market participants noticing cracks in the housing markets, a less dramatic decline in house prices could ease some of those concerns and provide some upside. Even though lots of tightening has been priced for the BoC , big enough upside surprise in CPI or incoming jobs data (showing the jobs market is holding up good) that triggers further hike expectations could provide some short-term upside.
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, inflation or jobs) could trigger outsized downside for the CAD. In recent communication, Governor Macklem started to mention some hiccups in housing. Big downside surprises in house prices could trigger speculation of a less hawkish bank and trigger 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 moved much higher than we anticipated. With a lot of good news priced in for the CAD and yields, our preferred way of trading the CAD is lower on short-term negative catalysts.