AUD
FUNDAMENTAL OUTLOOK: WEAK BULLISH
After a tumultuous ride in 2021, the AUD has seen a decent recovery so far this year. The geopolitical tensions in Europe gave
the commodity dependent currency a boost as commodity prices surged and seeing record highs for Australian terms of trade.
Apart from that, China’s economy has been a key focus point for the AUD. With China having a very different cyclical outlook
compared to other major economies, that has been a key positive driver for the AUD. While all major economies are expected
to slow this year, China (which has been slowing for the past 18 months) is expected to recover (monetary and fiscal policy is at
a big divergence between China and the rest of the world).
Thus, as long as China’s recovery expectations remain alive, that should continue to support the Australian economy as it means
further support for key commodity exports like Iron Ore, Coal and LNG.
The fact that the RBA has finally woken up from their slumber and started their hiking cycle fairly aggressively is also supportive
for the AUD. However, the short-term problem to the current bullish bias and something that has been weighing on the currency
is the continued covid dilemma facing China right now.
As long as the covid situation stays bleak, and China continues to lock down parts of the country due to their draconian covidzero policy, the AUD might struggle to take advantage of the other positive drivers and also makes it more sensitive to the overall
underlying negative risk sentiment in risk assets.
POSSIBLE HAWKISH 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, and catalyst 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, and any catalyst that triggers higher hike expectations (inflation and wage data) could trigger a bullish response from the AUD. Any catalyst that triggers further upside 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 DOVISH SURPRISES
Negative 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, and catalyst that causes big bouts of risk offsentiment could trigger bearish reactions in the AUD. Any catalyst that triggers downside in Australia’s key commodity exports (additional China restrictions, demand destruction fears) should be negative for 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. The
short-term covid issues have pushed back but not removed recovery expectations, but until the covid fog clears and the Chinese
economy struggles, the AUD will struggle to maintain upside momentum in the short-term, despite positive catalysts.
CAD
FUNDAMENTAL OUTLOOK: NEUTRAL
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 in the US should
have deteriorated the growth outlook for Canada.
Apart from that, the risks to the Canadian housing market risks to 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 economy and the risks to 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 positive and hawkish.
We’ve miss most of the move higher in the currency as we’ve been cautious in our bias, but the risks are still present and with
the currency at 9-year highs (at the index level) we have very little appetite for chasing it higher from here.
POSSIBLE HAWKISH SURPRISES
As an oil exporter, oil prices are important for CAD. Catalyst that sees further upside 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.
POSSIBLE DOVISH SURPRISES
As an oil exporter, oil prices are important for CAD. Catalyst that sees further upside 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 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 or inflation ) could trigger outsized 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
move much higher than we anticipated. With a lot of upside priced into the CAD and Canadian yields, our preferred way of
trading the CAD would be to look for short-term negative catalysts to trade the CAD lower instead of chasing it higher.
FUNDAMENTAL OUTLOOK: WEAK BULLISH
After a tumultuous ride in 2021, the AUD has seen a decent recovery so far this year. The geopolitical tensions in Europe gave
the commodity dependent currency a boost as commodity prices surged and seeing record highs for Australian terms of trade.
Apart from that, China’s economy has been a key focus point for the AUD. With China having a very different cyclical outlook
compared to other major economies, that has been a key positive driver for the AUD. While all major economies are expected
to slow this year, China (which has been slowing for the past 18 months) is expected to recover (monetary and fiscal policy is at
a big divergence between China and the rest of the world).
Thus, as long as China’s recovery expectations remain alive, that should continue to support the Australian economy as it means
further support for key commodity exports like Iron Ore, Coal and LNG.
The fact that the RBA has finally woken up from their slumber and started their hiking cycle fairly aggressively is also supportive
for the AUD. However, the short-term problem to the current bullish bias and something that has been weighing on the currency
is the continued covid dilemma facing China right now.
As long as the covid situation stays bleak, and China continues to lock down parts of the country due to their draconian covidzero policy, the AUD might struggle to take advantage of the other positive drivers and also makes it more sensitive to the overall
underlying negative risk sentiment in risk assets.
POSSIBLE HAWKISH 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, and catalyst 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, and any catalyst that triggers higher hike expectations (inflation and wage data) could trigger a bullish response from the AUD. Any catalyst that triggers further upside 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 DOVISH SURPRISES
Negative 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, and catalyst that causes big bouts of risk offsentiment could trigger bearish reactions in the AUD. Any catalyst that triggers downside in Australia’s key commodity exports (additional China restrictions, demand destruction fears) should be negative for 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. The
short-term covid issues have pushed back but not removed recovery expectations, but until the covid fog clears and the Chinese
economy struggles, the AUD will struggle to maintain upside momentum in the short-term, despite positive catalysts.
CAD
FUNDAMENTAL OUTLOOK: NEUTRAL
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 in the US should
have deteriorated the growth outlook for Canada.
Apart from that, the risks to the Canadian housing market risks to 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 economy and the risks to 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 positive and hawkish.
We’ve miss most of the move higher in the currency as we’ve been cautious in our bias, but the risks are still present and with
the currency at 9-year highs (at the index level) we have very little appetite for chasing it higher from here.
POSSIBLE HAWKISH SURPRISES
As an oil exporter, oil prices are important for CAD. Catalyst that sees further upside 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.
POSSIBLE DOVISH SURPRISES
As an oil exporter, oil prices are important for CAD. Catalyst that sees further upside 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 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 or inflation ) could trigger outsized 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
move much higher than we anticipated. With a lot of upside priced into the CAD and Canadian yields, our preferred way of
trading the CAD would be to look for short-term negative catalysts to trade the CAD lower instead of chasing it higher.
