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 Developments
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 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.
3. Geopolitics
The EUR pushed lower aggressively after 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.
4. CFTC Analysis
Another very bullish signal with all three major categories seeing another week of net-long weekly changes. Price action has been constructive and seems like EURUSD is trying to carve out a base. Fundamentally the momentum points lower but given how much bad news has been priced and recent hawkish ECB comments, we would prefer chasing longs on good news as opposed to chasing the EUR lower on bad news.
5. The Week Ahead
With a very light economic schedule, geopolitics, EU CPI and US data will be the biggest focus for the EUR next week. Since the EUR will have a quiet data week it could be impacted by moves in the USD more than usually, especially as it has a 57% weighting in the DXY . A big miss in US data like the PMIs or NFP could offer some upside for the EUR (and other majors of course). The positive flow in risk assets last week can also offer some upside for the EUR, but with the USD seeing 2 straight weeks of downside, the USD wasn’t very sensitive to equity upside. If risk can stage some overdue recovery this week, the Dollar flows will be an important factor for the EUR. On the EU data side, it’s light apart from flash CPI on Tuesday where markets are expecting another upside grind in price pressures for May. This is unlikely to change the ECB’s mind about policy next week, but a solid beat might be enough to give our EURCAD trade the boost it needs in the week ahead. Geopolitics will also be eyed, both on the Russian and Brexit fronts. On the Russia side, it seems that most of the negativity from a possible oil embargo might have been priced, but any negative developments or retaliation from Russia against Finland and Sweden’s bid to join NATO can cause an increase in EUR risk premium and weigh on the single currency. For now, the increased threats of terminating the Brexit deal have been rightly seen as posturing, but if any side actually goes through with their recent threats that could open up a decent opportunity for EURGBP upside (but we are still cautious of stretched GBP positioning though).
CAD
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
The BoC delivered on expectations with a 50bsp hike as well as announcing a start to passive QT from the end of April by ending its reinvestment of maturing bonds. The bank upgraded both inflation and growth estimates as markets were expecting but did play a hawkish card by also increasing their neutral rate estimate to 2.5% from 2.25%. They acknowledged the growing risks from the current geopolitical situation but made it very clear that they are concerned about inflation and their hike of 50bsp showed that they think that policy needs to be normalized quickly (which some took as a hint that another 50bsp is on the way). The bank didn’t offer any additional clarity on QT but did note that they are not considering active QT of selling bonds just yet. Some conditionality also surfaced, where they explained that any sudden negative shocks to growth or inflation could see them pause hikes once they get closer towards neutral ( Gov Macklem also added that they might need to get rates slightly above neutral in the current cycle). Overall, it was a more hawkish than expected BoC decision, but interesting to note that STIR markets did not price in another 50bsp following the meeting (only a 25bsp) hike. We remain of the opinion that we are close to peak hawkishness for the BoC and are looking for the last push higher in the CAD for opportunities to sell.
2. Intermarket Analysis
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).
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.
3. 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.
4. The Week Ahead
For the Canadian Dollar the main focus in the week ahead will of course be the upcoming BoC policy decision on Wednesday. From a baseline perspective, we know that STIR markets have been fully pricing in another 50bsp hike for the bank for quite some time. That’s important as it means a 50bsp by itself won’t be enough to really create volatility unless it’s a smaller or larger than 50bsp hike. That also means that all the attention will fall to the BoC’s tone and language. It’s been a bit too soon to see a spill over of the slowdown in the US into the Canadian economy, and GDP is expected to show another decent print this week. However, cracks have been starting to show, especially in the housing market where rising cost pressures and rising interest rates have been putting pressure on house prices. If that trend continues, and we think it will. It can cause a repricing in growth expectations for Canada and given the high levels of debt will be something the BoC will get more worried about in the months ahead. With all the upside that has been priced into the CAD at the index level, the risk to the downside is higher compared to further risk to the upside going into this week’s BoC . A dovish surprise could offer some upside for EURCAD and AUDCAD in the week ahead.
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 Developments
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 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.
3. Geopolitics
The EUR pushed lower aggressively after 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.
4. CFTC Analysis
Another very bullish signal with all three major categories seeing another week of net-long weekly changes. Price action has been constructive and seems like EURUSD is trying to carve out a base. Fundamentally the momentum points lower but given how much bad news has been priced and recent hawkish ECB comments, we would prefer chasing longs on good news as opposed to chasing the EUR lower on bad news.
5. The Week Ahead
With a very light economic schedule, geopolitics, EU CPI and US data will be the biggest focus for the EUR next week. Since the EUR will have a quiet data week it could be impacted by moves in the USD more than usually, especially as it has a 57% weighting in the DXY . A big miss in US data like the PMIs or NFP could offer some upside for the EUR (and other majors of course). The positive flow in risk assets last week can also offer some upside for the EUR, but with the USD seeing 2 straight weeks of downside, the USD wasn’t very sensitive to equity upside. If risk can stage some overdue recovery this week, the Dollar flows will be an important factor for the EUR. On the EU data side, it’s light apart from flash CPI on Tuesday where markets are expecting another upside grind in price pressures for May. This is unlikely to change the ECB’s mind about policy next week, but a solid beat might be enough to give our EURCAD trade the boost it needs in the week ahead. Geopolitics will also be eyed, both on the Russian and Brexit fronts. On the Russia side, it seems that most of the negativity from a possible oil embargo might have been priced, but any negative developments or retaliation from Russia against Finland and Sweden’s bid to join NATO can cause an increase in EUR risk premium and weigh on the single currency. For now, the increased threats of terminating the Brexit deal have been rightly seen as posturing, but if any side actually goes through with their recent threats that could open up a decent opportunity for EURGBP upside (but we are still cautious of stretched GBP positioning though).
CAD
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
The BoC delivered on expectations with a 50bsp hike as well as announcing a start to passive QT from the end of April by ending its reinvestment of maturing bonds. The bank upgraded both inflation and growth estimates as markets were expecting but did play a hawkish card by also increasing their neutral rate estimate to 2.5% from 2.25%. They acknowledged the growing risks from the current geopolitical situation but made it very clear that they are concerned about inflation and their hike of 50bsp showed that they think that policy needs to be normalized quickly (which some took as a hint that another 50bsp is on the way). The bank didn’t offer any additional clarity on QT but did note that they are not considering active QT of selling bonds just yet. Some conditionality also surfaced, where they explained that any sudden negative shocks to growth or inflation could see them pause hikes once they get closer towards neutral ( Gov Macklem also added that they might need to get rates slightly above neutral in the current cycle). Overall, it was a more hawkish than expected BoC decision, but interesting to note that STIR markets did not price in another 50bsp following the meeting (only a 25bsp) hike. We remain of the opinion that we are close to peak hawkishness for the BoC and are looking for the last push higher in the CAD for opportunities to sell.
2. Intermarket Analysis
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).
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.
3. 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.
4. The Week Ahead
For the Canadian Dollar the main focus in the week ahead will of course be the upcoming BoC policy decision on Wednesday. From a baseline perspective, we know that STIR markets have been fully pricing in another 50bsp hike for the bank for quite some time. That’s important as it means a 50bsp by itself won’t be enough to really create volatility unless it’s a smaller or larger than 50bsp hike. That also means that all the attention will fall to the BoC’s tone and language. It’s been a bit too soon to see a spill over of the slowdown in the US into the Canadian economy, and GDP is expected to show another decent print this week. However, cracks have been starting to show, especially in the housing market where rising cost pressures and rising interest rates have been putting pressure on house prices. If that trend continues, and we think it will. It can cause a repricing in growth expectations for Canada and given the high levels of debt will be something the BoC will get more worried about in the months ahead. With all the upside that has been priced into the CAD at the index level, the risk to the downside is higher compared to further risk to the upside going into this week’s BoC . A dovish surprise could offer some upside for EURCAD and AUDCAD in the week ahead.
