Swing trading opportunity! + Fundamental Drivers
Hello traders!
TD Securities have opened a new buy trade on usdcad
entry: 1.2413
stop: 1.2200
target: 1.2750
Rationale:
We add a long usdcad position to our fx model portfolio and target a move to 1.2750. A lot of good news appears in the cad price. Since September fed meeting, the cad has registered one of the largest builds on our positioning tracker.
This has helped to drive a discount on our cross asset fv measure (aprox. 1.25) and an even larger discount on our implied level derived from just global growth expectations and risk sentiment (1.27). Technicals also suggest sufficient signs of bottom in the pair (such as macd). Ourrates team also believes the global frontend repricing has matured.
Looking an OIS curve, we think risk/reward is unappealing to price in more tightening at the April 2022 meeting (which is already rather heroic assumption in our view) of for 3 hikes by July next year.
While CAD's oil beta has appreciably tightened in the recent weeks, the terms of trade boost may be well advanced as our commodity team expects WTI. oil to average $86 this quarter. We also expect a firmer USD in the weeks ahead, driven by outperformance against the low yielders and sticky fed pricing as well as seasonal boost that tends to occur in November.
Fundamental Drivers:
United States Dollar (USD)
Fundamental Bias: Weak Bullish
Primary driver:
1. The monetary policy outlook for the fed
Rationale:
More hawkish than expected sums up the sep meeting. The FOMC gave the go ahead for the November tapering announcement as long as the economy develops as expected with their criteria fo substantial further progress close to being met. The biggest hawkish tilt was the announcement about a faster pace of tapering, with Chair Powell saying there is broad agreement that tapering can be concluded by mid 2022. Inflation projections were hawkish, with the fed projecting core pace above their 2% until 2024. On labour, Chair Powell said he thought the substantial further progress threshold for employment was all but met and explained that it won't take a very strong September jobs much steeper than markets were anticipating with seven hikes expected over the forecast horizon from just two previously. It is important here to note though that even though the path was steeper, if one compares that to a projected Core pce>2% for 2022to 2024, the rate path does not exactly scream fear when it comes to inflation. ALLin all, it was a hawkish meeting. The upcoming NOV3rd meeting is expected to see the bank formally announce tapering at a a pace of 15billion per month starting in dec. With that largely expected, focus will fall on rate expectation where eurodollar futures implythree rate hikes between jun and dec 2022, which seems too aggressive right now son any push back or confirmation of that pricing arguably be a bigger driver for the usd and us rates this week compared to the expected tapering.
Primary driver:
2. Real yields
Rationale:
With q4 taper start and mir 2022 taper conclusion on the card, we think further downside in real yields will be a struggle and probability are skewed higher given the outlook for growth, inflation and policy, and higher real yield should be supportive for the usd in the med term.
primary driver:
3. The global risk outlook
Rationale:
One supporting factor for the usd from June was the onset of downside suprises in global growth. However, there has been a growing chorus of the market participants looking for a possible bounce in growth stat q4 after the covid and supply chain related slowdown in q3.If we do indeed see a pickup in growth, while inflation is still elevated, that would mean a reflationary environment, which is usually a negative input for the dollar, so we want to keep that in mind when assessing the incoming us economic data in the next few weeks.
primary driver:
4. economic data
rationale:
Very busy week for economic data with nfp on Friday and the usual slew of economic data that feeds into nfp being releases throughout the week ism report, adp. However, with the FOMC coming up on Wednesday, the data feeding into nfp will most likely take a back seat until we hear from the fed and depending on the type of tone that will largely impact how markets react to Fridays nfp release.
Primary driver:
5. CFTC analysis
Rationale:
Latest CFTC data showed a positioning change of - 1477 with a net non commercial position +34457. Positioning isn't anywhere near stress levels for the usd, but the speed of the build up in large speculator positioning has been sizeable 1 year look back period. Thus even though the med term bias remained unchanged it does mean usd could be sensitive to mean reversion risks while still trading close to ltd highs. This weeks FOMC will take centre stage though.
Canadian Dollar CAD
Fundamental Bias: Bullish
Primary driver:
1.The monetary policy outlook for The BoC
Rationale:
At their oct meeting the bank suprised the markets by decided to put an early qe purchases and also updated their forward guidance to suggest and earlier liftoff in rates by explaining that they now see economic slack being absorbed by die middle quarters of 2022. The initial reactions very bullish as one would expect an saw the cad appreciate across the board.We think the biggest risk to further upside for the cad from here is the fact that a lot of these positives confirmed by The BoC has already been reflected in both the cad and rates markets over the past few weeks. The Cad has seen a similar run to the upside back in 2021 q1 with the boc's hawkish tilt, and similarly to that we feel current prices for rates and cad already reflect a great deal of positives. Thus even though the med term outlook remains tilted to the upside for the cad there is a risk of seeing some unwind of the recent upside and is something to be mindful of when making any med term allocations to the upside in the cad.
Primary driver:
2. Commodity linked currency with dependency on oil exports
Rationale
Oil staged a massive recovery after hitting rock bottom in 2020 and the move higher over the recent months has been driven by supply and demand opec production cuts, improving global economic outlook an improving oil demand outlook, even though slightly pushed back by delta concerns, rising inflation expectations. Even though further gains for oil Will arguably prove to be an uphill battle, the bias remains which could affect the cad from an inter market point of view, but as long as the med term view for oil remains higher it should be supportive for metro currencies like the cad. The recent energy crisis affecting large parts of the globe's placed upside pressure in oil, gas and coal and has support for the cad. A possible risk for oil prices and by connection the cad is any attempts by the us or opec+ to calm down prices. On the us side they could opt to release more of their reserves and on specs side they could announce additional increases production output. This week we have another opec+ meeting so keeping that on the radar for the cad will be important in the week ahead.
Primary driver
3. Developments surrounding the global risk outlook
rationale:
As a high beta currency, the cad benefited from the markets improving risk outlook coming out of the pandemic as participants moved out of safe havens. As a pro cyclical currency the cad enjoyed upside alongside other cyclical assets supported by reflationand post recession recovery bets. If expectations for the global economy remains supportive the overall positive outlook for risk sentiment should be supportive for the cad in the med term, but recent short term jitters ar timely reminder that risk sentiment is also a very important short term driver.
primary driver:
4. CFTC analysis
Rationale
Latest CFTC data showed a positioning change of +14244 with a net non-commercial position of +3320. With a lot of positives in the price for the cad and the from and yields, it is however encouraging to see that positioning isn't stretched for either large specs or leveraged funds, and suggest that further upside could of course be possible if short term sentiment for oil and risk assets remain favourable.
Thank you for reading!
Have a great week! :)
Vitez
TD Securities have opened a new buy trade on usdcad
entry: 1.2413
stop: 1.2200
target: 1.2750
Rationale:
We add a long usdcad position to our fx model portfolio and target a move to 1.2750. A lot of good news appears in the cad price. Since September fed meeting, the cad has registered one of the largest builds on our positioning tracker.
This has helped to drive a discount on our cross asset fv measure (aprox. 1.25) and an even larger discount on our implied level derived from just global growth expectations and risk sentiment (1.27). Technicals also suggest sufficient signs of bottom in the pair (such as macd). Ourrates team also believes the global frontend repricing has matured.
Looking an OIS curve, we think risk/reward is unappealing to price in more tightening at the April 2022 meeting (which is already rather heroic assumption in our view) of for 3 hikes by July next year.
While CAD's oil beta has appreciably tightened in the recent weeks, the terms of trade boost may be well advanced as our commodity team expects WTI. oil to average $86 this quarter. We also expect a firmer USD in the weeks ahead, driven by outperformance against the low yielders and sticky fed pricing as well as seasonal boost that tends to occur in November.
Fundamental Drivers:
United States Dollar (USD)
Fundamental Bias: Weak Bullish
Primary driver:
1. The monetary policy outlook for the fed
Rationale:
More hawkish than expected sums up the sep meeting. The FOMC gave the go ahead for the November tapering announcement as long as the economy develops as expected with their criteria fo substantial further progress close to being met. The biggest hawkish tilt was the announcement about a faster pace of tapering, with Chair Powell saying there is broad agreement that tapering can be concluded by mid 2022. Inflation projections were hawkish, with the fed projecting core pace above their 2% until 2024. On labour, Chair Powell said he thought the substantial further progress threshold for employment was all but met and explained that it won't take a very strong September jobs much steeper than markets were anticipating with seven hikes expected over the forecast horizon from just two previously. It is important here to note though that even though the path was steeper, if one compares that to a projected Core pce>2% for 2022to 2024, the rate path does not exactly scream fear when it comes to inflation. ALLin all, it was a hawkish meeting. The upcoming NOV3rd meeting is expected to see the bank formally announce tapering at a a pace of 15billion per month starting in dec. With that largely expected, focus will fall on rate expectation where eurodollar futures implythree rate hikes between jun and dec 2022, which seems too aggressive right now son any push back or confirmation of that pricing arguably be a bigger driver for the usd and us rates this week compared to the expected tapering.
Primary driver:
2. Real yields
Rationale:
With q4 taper start and mir 2022 taper conclusion on the card, we think further downside in real yields will be a struggle and probability are skewed higher given the outlook for growth, inflation and policy, and higher real yield should be supportive for the usd in the med term.
primary driver:
3. The global risk outlook
Rationale:
One supporting factor for the usd from June was the onset of downside suprises in global growth. However, there has been a growing chorus of the market participants looking for a possible bounce in growth stat q4 after the covid and supply chain related slowdown in q3.If we do indeed see a pickup in growth, while inflation is still elevated, that would mean a reflationary environment, which is usually a negative input for the dollar, so we want to keep that in mind when assessing the incoming us economic data in the next few weeks.
primary driver:
4. economic data
rationale:
Very busy week for economic data with nfp on Friday and the usual slew of economic data that feeds into nfp being releases throughout the week ism report, adp. However, with the FOMC coming up on Wednesday, the data feeding into nfp will most likely take a back seat until we hear from the fed and depending on the type of tone that will largely impact how markets react to Fridays nfp release.
Primary driver:
5. CFTC analysis
Rationale:
Latest CFTC data showed a positioning change of - 1477 with a net non commercial position +34457. Positioning isn't anywhere near stress levels for the usd, but the speed of the build up in large speculator positioning has been sizeable 1 year look back period. Thus even though the med term bias remained unchanged it does mean usd could be sensitive to mean reversion risks while still trading close to ltd highs. This weeks FOMC will take centre stage though.
Canadian Dollar CAD
Fundamental Bias: Bullish
Primary driver:
1.The monetary policy outlook for The BoC
Rationale:
At their oct meeting the bank suprised the markets by decided to put an early qe purchases and also updated their forward guidance to suggest and earlier liftoff in rates by explaining that they now see economic slack being absorbed by die middle quarters of 2022. The initial reactions very bullish as one would expect an saw the cad appreciate across the board.We think the biggest risk to further upside for the cad from here is the fact that a lot of these positives confirmed by The BoC has already been reflected in both the cad and rates markets over the past few weeks. The Cad has seen a similar run to the upside back in 2021 q1 with the boc's hawkish tilt, and similarly to that we feel current prices for rates and cad already reflect a great deal of positives. Thus even though the med term outlook remains tilted to the upside for the cad there is a risk of seeing some unwind of the recent upside and is something to be mindful of when making any med term allocations to the upside in the cad.
Primary driver:
2. Commodity linked currency with dependency on oil exports
Rationale
Oil staged a massive recovery after hitting rock bottom in 2020 and the move higher over the recent months has been driven by supply and demand opec production cuts, improving global economic outlook an improving oil demand outlook, even though slightly pushed back by delta concerns, rising inflation expectations. Even though further gains for oil Will arguably prove to be an uphill battle, the bias remains which could affect the cad from an inter market point of view, but as long as the med term view for oil remains higher it should be supportive for metro currencies like the cad. The recent energy crisis affecting large parts of the globe's placed upside pressure in oil, gas and coal and has support for the cad. A possible risk for oil prices and by connection the cad is any attempts by the us or opec+ to calm down prices. On the us side they could opt to release more of their reserves and on specs side they could announce additional increases production output. This week we have another opec+ meeting so keeping that on the radar for the cad will be important in the week ahead.
Primary driver
3. Developments surrounding the global risk outlook
rationale:
As a high beta currency, the cad benefited from the markets improving risk outlook coming out of the pandemic as participants moved out of safe havens. As a pro cyclical currency the cad enjoyed upside alongside other cyclical assets supported by reflationand post recession recovery bets. If expectations for the global economy remains supportive the overall positive outlook for risk sentiment should be supportive for the cad in the med term, but recent short term jitters ar timely reminder that risk sentiment is also a very important short term driver.
primary driver:
4. CFTC analysis
Rationale
Latest CFTC data showed a positioning change of +14244 with a net non-commercial position of +3320. With a lot of positives in the price for the cad and the from and yields, it is however encouraging to see that positioning isn't stretched for either large specs or leveraged funds, and suggest that further upside could of course be possible if short term sentiment for oil and risk assets remain favourable.
Thank you for reading!
Have a great week! :)
Vitez
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