CAD CHF BUY (CANADIAN DOLLAR - SWISS FRANC)
CAD
FUNDAMENTAL BIAS: BULLISH
1. The Monetary Policy outlook for the BoC
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.
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 (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 (reflation). Even though further gains for Oil will arguably prove to be an uphill battle, 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 safe- havens 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. It seems that a lot of the concerns about positioning in the CAD has abated after the currency’s push lower and have seen participants being willing to trade the CAD back in line with its fundamental bullish outlook.
4. CFTC Analysis
The CAD only saw some marginal positioning changes (+2086) with the latest CFTC data updated until Tuesday 3 August. The CAD’s positioning has seen a substantial unwind in the past few weeks after the CAD got a bit frothy after the April BoC policy meeting where the bank took a substantial hawkish tilt. However, in the past few weeks a lot of the froth has been washed out and with the bias for the CAD still bullish in the med-term, the current positioning means we could see med-term buyers stepping back in gradually.
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 is improving with coronavirus vaccines being rolled out as well as the unprecedented amount of monetary policy accommodation and fiscal support from governments. Of course, risks remain as many countries are now battling third waves of the virus. As such, there is still a degree of uncertainty and risks to the overall risk outlook which could prove supportive for 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.
2. CFTC Analysis
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, thus be careful when trading the CHF and always keep the possibility of SNB intervention in mind. In a recent note ING investment provided their rationale for the recent strength in the CHF and explained that the lower inflation in Switzerland compared to the EU means the real trade-weighted CHF is actually trading too cheap. Furthermore, the ECB’s bond buying has meant that their balance sheet is expanding more rapidly compared to that of the SNB, and without any meaningful FX intervention the CHF runs the risk of slowly creeping higher, especially versus the EUR.
The positioning for the CHF reveals the surprising strength of the currency over the past few weeks as it is now the third largest net-long positioning among the major currencies. At the current level of positioning, one has to argue that the CHF offers attractive levels to sell into, but as the above comments noted, there might have been idiosyncratic factors providing support for the CHF. However, if the recent Fed rhetoric and Friday’s US jobs report sparks some risk off flows in the week ahead that could provide further support for the CHF, which means keeping a close eye on risk sentiment will be important as always.
FUNDAMENTAL BIAS: BULLISH
1. The Monetary Policy outlook for the BoC
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.
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 (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 (reflation). Even though further gains for Oil will arguably prove to be an uphill battle, 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 safe- havens 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. It seems that a lot of the concerns about positioning in the CAD has abated after the currency’s push lower and have seen participants being willing to trade the CAD back in line with its fundamental bullish outlook.
4. CFTC Analysis
The CAD only saw some marginal positioning changes (+2086) with the latest CFTC data updated until Tuesday 3 August. The CAD’s positioning has seen a substantial unwind in the past few weeks after the CAD got a bit frothy after the April BoC policy meeting where the bank took a substantial hawkish tilt. However, in the past few weeks a lot of the froth has been washed out and with the bias for the CAD still bullish in the med-term, the current positioning means we could see med-term buyers stepping back in gradually.
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 is improving with coronavirus vaccines being rolled out as well as the unprecedented amount of monetary policy accommodation and fiscal support from governments. Of course, risks remain as many countries are now battling third waves of the virus. As such, there is still a degree of uncertainty and risks to the overall risk outlook which could prove supportive for 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.
2. CFTC Analysis
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, thus be careful when trading the CHF and always keep the possibility of SNB intervention in mind. In a recent note ING investment provided their rationale for the recent strength in the CHF and explained that the lower inflation in Switzerland compared to the EU means the real trade-weighted CHF is actually trading too cheap. Furthermore, the ECB’s bond buying has meant that their balance sheet is expanding more rapidly compared to that of the SNB, and without any meaningful FX intervention the CHF runs the risk of slowly creeping higher, especially versus the EUR.
The positioning for the CHF reveals the surprising strength of the currency over the past few weeks as it is now the third largest net-long positioning among the major currencies. At the current level of positioning, one has to argue that the CHF offers attractive levels to sell into, but as the above comments noted, there might have been idiosyncratic factors providing support for the CHF. However, if the recent Fed rhetoric and Friday’s US jobs report sparks some risk off flows in the week ahead that could provide further support for the CHF, which means keeping a close eye on risk sentiment will be important as always.
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