At the July meeting the BoC confirmed market’s speculation that they will continue to scale back asset purchases by tapering QE with another C1bln reduction per week. Even though the bank’s language and overall tone was in line with overall consensus, the reaction in the CAD suggests that some participants might have been expecting more from the bank in terms of a hawkish tilt. The bank also reiterated that there is particular uncertainty in their projections and stressed that the economic recovery requires extraordinary policy accommodation, which arguably is something the bulls wanted to see removed in the statement. Even though the upcoming federal elections or the recent softer data patch won’t really alter the BoC’s policy normalization path, but with these two factors in mind the markets are expecting the central bank to take a bit of a cautious tone this upcoming week.
2. Commodity-linked currency with dependency on Oil exports
Oil staged a massive recovery after hitting rock bottom in 2020. The move higher over the past few months has been driven by [b[1] supply & demand (OPEC’s production cuts); [2] improving global economic outlook and improving oil demand outlook (vaccines and monetary and fiscal stimulus induced recoveries); [3] rising inflation expectations. Even though further gains for Oil will arguably prove to be an uphill battle from here, the bias remains positive in the med-term as long as the current supportive factors and drivers remains intact. We will of course have short-term ebbs and flows as we’ve seen in recent weeks which could affect the CAD from an intermarket point of view, but as long as the med-term view for Oil remains higher that should be supportive for Petro-currencies like the CAD.
3. Developments surrounding the global risk outlook.
As a high-beta currency, CAD has benefited from the market's improving risk outlook over recent months as participants moved out of safehavens and into riskier, higher-yielding assets. As a pro-cyclical currency, the CAD enjoyed upside alongside other cyclical assets going into what majority of market participants think was an early post-recession recovery phase. As long as expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the CAD in the med-term, but the recent short-term jitters and risk off flows once again showed us why risk sentiment is also a very important short-term driver for the currency.
4. CFTC Analysis
Latest CFTC data for the CAD (updated until 31 August) showed a positioning change of -8725 with a net non-commercial position of -2848. After some substantial unwinding of oversubscribed net-long positioning, we’ve now seen CAD positioning move into net-short territory, where is exactly where we want it to be as it means there is a lot of room left to run to the upside in line with the overall bullish fundamentals. However, as the BoC is expected to strike a more cautious tone at this week’s upcoming meeting we are taking things patient with the Canadian Dollar until we get the BoC meeting and Canadian Federal elections out of the way.
JPY
FUNDAMENTAL BIAS: BEARISH
1. Safe-haven status and overall risk outlook
As a safe-haven currency, the market's risk outlook is the primary driver of JPY. Economic data rarely proves market moving; and although monetary policy expectations can prove highly market-moving in the short-term, safe-haven flows are typically the more dominant factor. The market's overall risk tone has improved considerably following the pandemic with good news about successful vaccinations, and ongoing monetary and fiscal policy support paved the way for markets to expect a robust global economic recovery. Of course, there remains many uncertainties and many countries are continuing to fight virus waves, but as a whole the outlook has kept on improving over the past couple of months, which would expect safe-haven demand to diminish and result in a bearish outlook for the JPY.
2. Low-yielding currency with inverse correlation to US10Y
As a low yielding currency, the JPY usually shares an inverse correlation to strong moves in yield differentials, more specifically in strong moves in US10Y. However, like most correlations, the strength of the inverse correlation between the JPY and US10Y is not perfect and will ebb and flow depending on the type of market environment from a risk and cycle point of view. The rangebound price action in US10Y from July has meant our conviction in JPY shorts has reduced versus the US Dollar, and until US10Y can convincingly break higher and take out it’s recent range highs we will stay more patient with USDJPY longs.
3. CFTC Analysis
Latest CFTC data for the JPY (updated until 31 August) showed a positioning change of +3541 with a net non-commercial position of -63130. With positioning still the largest net-short among the majors we want to be careful of the risks going into September which is historically the worse performing month for equities. That alone doesn’t mean we are expecting equities to push lower but given the frothy price action over recent weeks (haven’t seen a 5% correction in the S&P500 in 11 months) as well as seasonality and the growing chorus of participants calling for a bigger correction, we don’t want to ignore the possibility of some increased volatility this month. That doesn’t mean we start buying the JPY of course, it just means that if we do see some jitters creeping in for risk assets it is expected to be positive for the JPY, and with the biggest net-short for the majors there is a lot of downside in the JPY that can be unwound in such a scenario.
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.