CAD CHF - FUNDAMENTAL DRIVERS
CAD
FUNDAMENTAL BIAS: BULLISH
1. The Monetary Policy outlook for the BoC
At their September meeting the BoC delivered on market expectations by not providing any new information. The bank acknowledged the recent hit to growth has been bigger than expected, but also explained that they deem the hit to be temporary and still expect solid growth this year. They also reiterated that even though inflation is currently high and expected to climb, they deem current price pressures as being mostly transitory. The meeting did nothing to change the market’s expectations that the bank will go ahead to announce another round of tapering of C$1 billion at their October meeting, especially after the recent jobs report painted a picture of a growing and recovering labour market, albeit at a slightly slower pace compared to June and July.
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 supply & demand (OPEC’s production cuts); improving global economic outlook and improving oil demand outlook, even though slightly pushed back by Delta concerns (vaccines and monetary and fiscal stimulus induced recoveries); 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 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. If 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 (updated until 14 Sep) showed a positioning change of -3273 with a net non-commercial position of -9283. After some substantial unwinding of oversubscribed net-long positioning over the past couple of months, we’ve now seen CAD positioning move into netshort territory, and since the med-term bias is still bullish it means there is room left to run to the upside in line with the overall bullish fundamentals. Even though market expectations for Oct tapering is intact, markets have been reluctant to trade the CAD back in line with its fundamental bias. The USDCAD as a good example have of course seen large swings in the past two months, but despite them the pair remains largely unchanged from where we were trading two months ago. Patience might be required with this one until we get more clarity from incoming US data as well as expected tapering actions from the Fed.
CHF
FUNDAMENTAL BIAS: BEARISH
1. Developments surrounding the global risk outlook.
As a safe-haven currency, the market's risk outlook is the primary driver for the CHF. Swiss economic data rarely proves market moving; and although SNB intervention can have a substantial impact on CHF, its impact tends to be relatively short-lived. Additionally, the SNB are unlikely to adjust policy anytime soon, given their overall bearish tone and a preference for being behind the ECB in terms of policy decisions. The market's overall risk tone has improving considerably from just a year ago because of the global vaccine roll out and the unprecedented amount of monetary policy accommodation and fiscal support from governments. The Delta variant and subsequent impact on growth expectations is of course a sobering reminder that risks remain. Thus, there is still a degree of uncertainty and risks to the overall risk outlook remains which could prove supportive for the safe havens like the CHF should negative factors for the global economy develop. However, on balance the overall risk outlook is continuing to improve and barring any major meltdowns in risk assets the bias for the CHF remains bearish in the med-term .
2. Idiosyncratic drivers for the CHF
Despite the negative drivers, the CHF has remained surprisingly strong over the past couple of weeks. This divergence from the fundamental outlook doesn’t make much sense, but the CHF often has a mind of its own and can often move in opposite directions from what short-term sentiment or its fundamental outlook suggests. Recent research from the team has revealed an interesting correlation between the CHF simultaneous price moves in Gold and the USD which could explain some of the recent price action. We also need to be careful of the possibility of SNB FX intervention. Apart from that, ING investment bank has recently argued that recent CHF strength could be due to the lower inflation in Switzerland compared to the EU which meant that the real trade-weighted CHF has been trading too cheap. They also expanded that the ECB’s bond buying has meant that their balance sheet is expanding more rapidly compared to that of the SNB, which could have been reasons why the SNB did not see the need for any meaningful FX intervention lately. The bottom line is that there are often plenty of idiosyncratic drivers which might or might not impact the CHF and makes short-term price fluctuations a mixed bag for the most part.
3. CFTC Analysis
Latest CFTC data (updated until 14 Sep) showed a positioning change of -6098 with a net non-commercial position of -5878. The CHF positioning continued to unwind some of its recent surprising strength over the past few weeks. The CHF has now moved back into net-short territory as one would expect from a currency with an overall med-term bearish outlook. Even though we expect the currency to continue weakening in the med-term , any drastic escalation in risk off tones could continue to provide support for the safe-haven currency in the short-term.
FUNDAMENTAL BIAS: BULLISH
1. The Monetary Policy outlook for the BoC
At their September meeting the BoC delivered on market expectations by not providing any new information. The bank acknowledged the recent hit to growth has been bigger than expected, but also explained that they deem the hit to be temporary and still expect solid growth this year. They also reiterated that even though inflation is currently high and expected to climb, they deem current price pressures as being mostly transitory. The meeting did nothing to change the market’s expectations that the bank will go ahead to announce another round of tapering of C$1 billion at their October meeting, especially after the recent jobs report painted a picture of a growing and recovering labour market, albeit at a slightly slower pace compared to June and July.
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 supply & demand (OPEC’s production cuts); improving global economic outlook and improving oil demand outlook, even though slightly pushed back by Delta concerns (vaccines and monetary and fiscal stimulus induced recoveries); 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 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. If 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 (updated until 14 Sep) showed a positioning change of -3273 with a net non-commercial position of -9283. After some substantial unwinding of oversubscribed net-long positioning over the past couple of months, we’ve now seen CAD positioning move into netshort territory, and since the med-term bias is still bullish it means there is room left to run to the upside in line with the overall bullish fundamentals. Even though market expectations for Oct tapering is intact, markets have been reluctant to trade the CAD back in line with its fundamental bias. The USDCAD as a good example have of course seen large swings in the past two months, but despite them the pair remains largely unchanged from where we were trading two months ago. Patience might be required with this one until we get more clarity from incoming US data as well as expected tapering actions from the Fed.
CHF
FUNDAMENTAL BIAS: BEARISH
1. Developments surrounding the global risk outlook.
As a safe-haven currency, the market's risk outlook is the primary driver for the CHF. Swiss economic data rarely proves market moving; and although SNB intervention can have a substantial impact on CHF, its impact tends to be relatively short-lived. Additionally, the SNB are unlikely to adjust policy anytime soon, given their overall bearish tone and a preference for being behind the ECB in terms of policy decisions. The market's overall risk tone has improving considerably from just a year ago because of the global vaccine roll out and the unprecedented amount of monetary policy accommodation and fiscal support from governments. The Delta variant and subsequent impact on growth expectations is of course a sobering reminder that risks remain. Thus, there is still a degree of uncertainty and risks to the overall risk outlook remains which could prove supportive for the safe havens like the CHF should negative factors for the global economy develop. However, on balance the overall risk outlook is continuing to improve and barring any major meltdowns in risk assets the bias for the CHF remains bearish in the med-term .
2. Idiosyncratic drivers for the CHF
Despite the negative drivers, the CHF has remained surprisingly strong over the past couple of weeks. This divergence from the fundamental outlook doesn’t make much sense, but the CHF often has a mind of its own and can often move in opposite directions from what short-term sentiment or its fundamental outlook suggests. Recent research from the team has revealed an interesting correlation between the CHF simultaneous price moves in Gold and the USD which could explain some of the recent price action. We also need to be careful of the possibility of SNB FX intervention. Apart from that, ING investment bank has recently argued that recent CHF strength could be due to the lower inflation in Switzerland compared to the EU which meant that the real trade-weighted CHF has been trading too cheap. They also expanded that the ECB’s bond buying has meant that their balance sheet is expanding more rapidly compared to that of the SNB, which could have been reasons why the SNB did not see the need for any meaningful FX intervention lately. The bottom line is that there are often plenty of idiosyncratic drivers which might or might not impact the CHF and makes short-term price fluctuations a mixed bag for the most part.
3. CFTC Analysis
Latest CFTC data (updated until 14 Sep) showed a positioning change of -6098 with a net non-commercial position of -5878. The CHF positioning continued to unwind some of its recent surprising strength over the past few weeks. The CHF has now moved back into net-short territory as one would expect from a currency with an overall med-term bearish outlook. Even though we expect the currency to continue weakening in the med-term , any drastic escalation in risk off tones could continue to provide support for the safe-haven currency in the short-term.
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