AUD
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
In Dec the RBA kept rates at 0.10% and weekly bond purchases at A$4bln until mid-Feb, as expected. They reiterated their commitment to maintain highly supportive monetary conditions and won’t raise rates until actual inflation is sustainably within their 2%-3% target range. They noted that the economy is recovering from the Delta slowdown and is expected to return to pre-Delta path in 1H22. The positive take from the meeting was that the RBA did not think Omicron will derail the expected recovery and sounded more optimistic than markets anticipated. They also said they will consider the future of their QE program at the Feb meeting and outlined their criteria for that which includes actions of other central banks, bond market functioning and actual and expected progress towards the goals of full employment and inflation consistent with their target. All in all, the bank still had a dovish stance but was more optimistic about the economy than expected. Furthermore, out of the 3 criteria set by the bank, the first two is arguably a green light already, which means the only thing we are waiting for is incoming employment and inflation data to see whether it’s good enough to stop QE.
2. Idiosyncratic Drivers & Intermarket Analysis
There are 4 key drivers we’re watching for Australia’s med-term outlook: The virus situation – so far, the RBA has been positive about a post-Delta recovery, but incoming employment and inflation data will be crucial to see whether that optimism is justified. China – Even though the PBoC has finally stepped up with new stimulus & some fiscal support is expected in 1H22, the Covid-Zero policy in China does pose a risk to their expected 2022 recovery so the recent rapid rise in cases is one to watch. Politically, the AUKUS defence pact could see possible retaliation from China against Australian goods and is always something to keep on the radar. Commodities – Iron Ore, (24% of exports) and Coal prices (18% of exports) are important for terms of trade, and with both pushing higher on PBoC easing, that is a positive for the AUD as long as they maintain their recent push higher. Global growth – as a risk proxy, the global economy is an important consideration for AUD, which means the expected slowdown in growth and inflation globally is an important point to consider, but if China can put in a solid year that should limit the fall out if the global economy slows faster than expected.
3. Global Risk Outlook
As a high-beta currency, the AUD 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 AUD.
4. CFTC Analysis
Latest CFTC data showed positioning change of -2120 with a net non-commercial position of -91486. As outsized net-shorts are usually seen as a contrarian indicator we want to be mindful of potential squeezes higher for the AUD, which also means that the AUD is most likely going to be more sensitive to positive data compared to negative data because a lot of the bad news associated with the currency has arguably been priced in. The recent downside in equities have seen an additional increase in AUD net-shorts with the positioning hitting a new record low which means the risk to reward of chasing the AUD lower from here isn’t very attractive.
5. The Week Ahead
The most important data point for the AUD in the week ahead is the upcoming employment data scheduled for Thursday. Recall that the RBA gave us three criteria they will be watching to determine the future of their asset purchase program, and with 2 of those 3 criteria arguable already confirmed, the only thing left is the economic data. Market consensus is looking for a much lower number in Dec (43.3K) compared to the massive surprise beat in Nov (366K) and expect the Unemployment Rate to drop to 4.5% from the prior of 4.6%. A solid beat in the data should see markets pricing in a higher probability that the RBA announces an end to their QE program at the Feb meeting and could see some of that very stretched net-short positioning seeing a bigger unwind. Alternatively, money markets have been very aggressive in their policy expectations for the RBA with 4 hikes priced by the end of the year, which means a much bigger than expected miss could see some of that pushed out to 2023 as a delayed end of QE means less optionality for the RBA later in the year.
CAD
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
In Dec the BoC left rates at 0.25% as expected and maintained forward guidance where it expects rates at current levels until the middle quarters of 2022. This disappointed some participants who were looking for the bank to announce that the output gap could be closed in 1Q22. On inflation , even though the bank still thinks it will ease from 2H22, they did drop ‘temporary’ when referring to price pressures, similar to the Fed’s removing the word ‘transitory’. The bank took a slightly bleaker view on growth, pointing to both the new Omicron variant and flooding in British Columbia as possibly drags on growth and something that could elevate supply chain issues. What disappointed markets a bit was that the bank said none of the recent developments warrants any further adjustments to normalization, which disappointed the bulls looking for a possible hawkish tilt. The bank noted that employment is back to pre-covid levels, and economic momentum in Q4 were solid, but the overall tone wasn’t enough to convince markets of a Jan hike at that time, but markets have since then continued to ramp up hike bets with money markets pricing in a >70% chance of a hike at the Jan meeting and pricing in close to 6 hikes for 2022. Keep in mind that the bank was already concerned about growth before the recent Omicron restrictions, which means the likelihood of them brining forward output gap projections seems unlikely and for that reason we think is setting up for a disappointment and possible repricing lower in money market expectations in the upcoming meetings.
2. Intermarket Analysis Considerations
Oil’s massive post-covid recovery has been impressive, driven by three drivers: supply & demand (OPEC’s production cuts); improving global economic outlook and improving oil demand outlook, even though slightly pushed back by Delta concerns; higher for longer than expected inflation . Even though Oil has recovered a lot of its recent downside and have proven our caution wrong, we are still cautious going into the first two quarters. The drivers keeping us cautious is expectations of a more hawkish Fed, slowing growth and inflation , lower inflation expectations (due to the Fed) and a possible supply surplus in 1Q22. If our concerns
do materialize into downside for oil prices it should put pressure on the CAD. There have however been shortterm drivers supporting Oil prices and has kept the CAD more supported than we would have expected.
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
Latest CFTC data showed a positioning change of +3649 with a net non-commercial position of -7376. Recent price action has seen the CAD take a very similar path compared to April and Oct 2021 where markets were way too aggressive to price in upside for the CAD only to see majority of it unwind. We think the CAD is setting up for a similar disappointment with money markets way too aggressive on rate expectations for 2022.
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
In Dec the RBA kept rates at 0.10% and weekly bond purchases at A$4bln until mid-Feb, as expected. They reiterated their commitment to maintain highly supportive monetary conditions and won’t raise rates until actual inflation is sustainably within their 2%-3% target range. They noted that the economy is recovering from the Delta slowdown and is expected to return to pre-Delta path in 1H22. The positive take from the meeting was that the RBA did not think Omicron will derail the expected recovery and sounded more optimistic than markets anticipated. They also said they will consider the future of their QE program at the Feb meeting and outlined their criteria for that which includes actions of other central banks, bond market functioning and actual and expected progress towards the goals of full employment and inflation consistent with their target. All in all, the bank still had a dovish stance but was more optimistic about the economy than expected. Furthermore, out of the 3 criteria set by the bank, the first two is arguably a green light already, which means the only thing we are waiting for is incoming employment and inflation data to see whether it’s good enough to stop QE.
2. Idiosyncratic Drivers & Intermarket Analysis
There are 4 key drivers we’re watching for Australia’s med-term outlook: The virus situation – so far, the RBA has been positive about a post-Delta recovery, but incoming employment and inflation data will be crucial to see whether that optimism is justified. China – Even though the PBoC has finally stepped up with new stimulus & some fiscal support is expected in 1H22, the Covid-Zero policy in China does pose a risk to their expected 2022 recovery so the recent rapid rise in cases is one to watch. Politically, the AUKUS defence pact could see possible retaliation from China against Australian goods and is always something to keep on the radar. Commodities – Iron Ore, (24% of exports) and Coal prices (18% of exports) are important for terms of trade, and with both pushing higher on PBoC easing, that is a positive for the AUD as long as they maintain their recent push higher. Global growth – as a risk proxy, the global economy is an important consideration for AUD, which means the expected slowdown in growth and inflation globally is an important point to consider, but if China can put in a solid year that should limit the fall out if the global economy slows faster than expected.
3. Global Risk Outlook
As a high-beta currency, the AUD 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 AUD.
4. CFTC Analysis
Latest CFTC data showed positioning change of -2120 with a net non-commercial position of -91486. As outsized net-shorts are usually seen as a contrarian indicator we want to be mindful of potential squeezes higher for the AUD, which also means that the AUD is most likely going to be more sensitive to positive data compared to negative data because a lot of the bad news associated with the currency has arguably been priced in. The recent downside in equities have seen an additional increase in AUD net-shorts with the positioning hitting a new record low which means the risk to reward of chasing the AUD lower from here isn’t very attractive.
5. The Week Ahead
The most important data point for the AUD in the week ahead is the upcoming employment data scheduled for Thursday. Recall that the RBA gave us three criteria they will be watching to determine the future of their asset purchase program, and with 2 of those 3 criteria arguable already confirmed, the only thing left is the economic data. Market consensus is looking for a much lower number in Dec (43.3K) compared to the massive surprise beat in Nov (366K) and expect the Unemployment Rate to drop to 4.5% from the prior of 4.6%. A solid beat in the data should see markets pricing in a higher probability that the RBA announces an end to their QE program at the Feb meeting and could see some of that very stretched net-short positioning seeing a bigger unwind. Alternatively, money markets have been very aggressive in their policy expectations for the RBA with 4 hikes priced by the end of the year, which means a much bigger than expected miss could see some of that pushed out to 2023 as a delayed end of QE means less optionality for the RBA later in the year.
CAD
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
In Dec the BoC left rates at 0.25% as expected and maintained forward guidance where it expects rates at current levels until the middle quarters of 2022. This disappointed some participants who were looking for the bank to announce that the output gap could be closed in 1Q22. On inflation , even though the bank still thinks it will ease from 2H22, they did drop ‘temporary’ when referring to price pressures, similar to the Fed’s removing the word ‘transitory’. The bank took a slightly bleaker view on growth, pointing to both the new Omicron variant and flooding in British Columbia as possibly drags on growth and something that could elevate supply chain issues. What disappointed markets a bit was that the bank said none of the recent developments warrants any further adjustments to normalization, which disappointed the bulls looking for a possible hawkish tilt. The bank noted that employment is back to pre-covid levels, and economic momentum in Q4 were solid, but the overall tone wasn’t enough to convince markets of a Jan hike at that time, but markets have since then continued to ramp up hike bets with money markets pricing in a >70% chance of a hike at the Jan meeting and pricing in close to 6 hikes for 2022. Keep in mind that the bank was already concerned about growth before the recent Omicron restrictions, which means the likelihood of them brining forward output gap projections seems unlikely and for that reason we think is setting up for a disappointment and possible repricing lower in money market expectations in the upcoming meetings.
2. Intermarket Analysis Considerations
Oil’s massive post-covid recovery has been impressive, driven by three drivers: supply & demand (OPEC’s production cuts); improving global economic outlook and improving oil demand outlook, even though slightly pushed back by Delta concerns; higher for longer than expected inflation . Even though Oil has recovered a lot of its recent downside and have proven our caution wrong, we are still cautious going into the first two quarters. The drivers keeping us cautious is expectations of a more hawkish Fed, slowing growth and inflation , lower inflation expectations (due to the Fed) and a possible supply surplus in 1Q22. If our concerns
do materialize into downside for oil prices it should put pressure on the CAD. There have however been shortterm drivers supporting Oil prices and has kept the CAD more supported than we would have expected.
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
Latest CFTC data showed a positioning change of +3649 with a net non-commercial position of -7376. Recent price action has seen the CAD take a very similar path compared to April and Oct 2021 where markets were way too aggressive to price in upside for the CAD only to see majority of it unwind. We think the CAD is setting up for a similar disappointment with money markets way too aggressive on rate expectations for 2022.