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USD CAD - FUNDAMENTAL DRIVERS USD FUNDAMENTAL BIAS: BULLISH 1. Monetary Policy The Fed turned a lot more hawkish than expected in Dec. They doubled the pace of tapering to $30 billion per month which will see QE concluded by March 2022 as was widely expected. Surprisingly though the Summary of Econ Projections showed the median dot plot pencilled in 3 hikes for 2022 (up from the previous 1), confirming Fed Fund Future expectations. Fed Chair Powell explained they hadn’t decided whether to pause between the end of tapering and a first hike but reiterated that rates will likely only rise when QE has concluded. Another positive shift was Powell’s comments that they could raise rates before full employment has been met due to high inflation, and stated that with inflation above target, they cannot wait too long to get to maximum employment as current inflation levels is seen as a threat to max employment. The hawkish tilt went further to note that the bank started discussing the balance sheet but said no decisions were made on when QT might commence. Even though the dots projected 3 hikes for 2022, the updated rate trajectory only showed 1 additional hike over the forecast horizon, which combined with a lower terminal rate was less hawkish than some had feared. Nonetheless, the meeting marked a material hawkish shift from the Fed, putting it on par with the likes of the RBNZ. The meeting minutes also revealed that the QT discussion saw majority of members thinking it appropriate to start QT soon after rate lift off and another more hawkish tilt than expected from the Fed. 2. Global Risk Outlook The growth & inflation outlook for the US and the globe will be key for the USD. The USD is often inversely correlated to global growth & inflation, doing bad during reflationary environments (growth and inflation accelerating), while the USD usually does well in disinflationary environments (growth and inflation decelerating). Thus, with expectations that both growth and inflation will decelerate this year, both in the US and the globe, that should be a positive input for the USD in the med-term. However, incoming data will also be important to see how the Fed responds to it, where a worsening outlook that deteriorates much faster than expected could see a dovish pivot from the Fed which could mean downside for the USD if money markets start pricing out hikes (especially with markets now expected just over 4 hikes for 2022). 3. CFTC Analysis Latest CFTC data showed a positioning change of -1458 with a net non-commercial position of +36434. The shortterm unwinding of stretched USD longs played out exactly as expected but was also short-lived in the midst of the recent strong risk off moves in certain parts of the market. Surprisingly, the big flush lower in the USD has not showed up in the CFTC data as expected with very little change to the overall positioning. In the current context, the stretched long positioning makes the USD vulnerable in the event that the Fed does not deliver the very hawkish tone expected of them in this week’s upcoming FOMC meeting. 4. The Week Ahead For the USD the big focus this week will be overall risk sentiment and the first FOMC meeting for 2022 on Wednesday, followed by Friday’s Core PCE and Employment Cost index prints. The latter will of course be important given the inflation outlook with more emphasis recently on the odds of a possible wage spiral affect. However, the main event will be the FOMC, where the meeting is expected to serve as a signalling meeting to pave the way for a 25bsp hike in March and to provide more clarity on the bank’s balance sheet plans. With a March hike sitting close to a 90% probability, and markets already fully pricing in 4 hikes this year, the bar has been set quite high for a hawkish surprise. However, there are also some participants that think the recent econ data (CPI YY >7% and Unemployment <4%) justifies an early end to the Fed’s QE program instead of allowing tapering to run it’s planned course until March. That would certainly give a more hawkish feel to the meeting and could see markets pricing in an even earlier and faster pace of QT if confirmed. But, if the Fed does not deliver on an early end to QE, and does not offer a strong enough signal that the 4 hikes priced by the market is justified, we could be in store for some moderation in the rise in yields and the USD and could also prove to be supportive for equities which ended last week in quite bad shape. CAD FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy In Dec the BoC left rates at 0.25% as expected and maintained forward guidance where it expects rates at current levels until the middle quarters of 2022. This disappointed some participants who were looking for the bank to announce that the output gap could be closed in 1Q22. On inflation, even though the bank still thinks it will ease from 2H22, they did drop ‘temporary’ when referring to price pressures, similar to the Fed’s removing the word ‘transitory’. The bank took a slightly bleaker view on growth, pointing to both the new Omicron variant and flooding in British Columbia as possibly drags on growth and something that could elevate supply chain issues. What disappointed markets a bit was that the bank said none of the recent developments warrants any further adjustments to normalization, which disappointed the bulls looking for a possible hawkish tilt. The bank noted that employment is back to pre-covid levels, and economic momentum in Q4 were solid, but the overall tone wasn’t enough to convince markets of a Jan hike at that time, but markets have since then continued to ramp up hike bets with money markets pricing in a >70% chance of a hike at the Jan meeting and pricing in close to 6 hikes for 2022. Keep in mind that the bank was already concerned about growth before the recent Omicron restrictions, which means the likelihood of them bringing forward output gap projections seems unlikely and for that reason we think is setting up for a disappointment and possible repricing lower in money market expectations in the upcoming meetings. 2. Intermarket Analysis Considerations Oil’s massive post-covid recovery has been impressive, driven by various factors such as supply & demand (OPEC’s production cuts), the strong global recovery which led to an improved demand, and of course ‘higher for longer’ than expected inflation. Even though Oil has traded to new 7-year highs last week, we are still cautious going into the first two quarters of 2022. The drivers keeping us cautious are expectations of a more hawkish Fed, slowing growth and inflation, lower inflation expectations (due to the Fed), a possible supply surplus in 1Q22, and a consensus that is very long oil (growing call for $100 WTI). If our concerns do materialize into downside for oil prices it should put pressure on the CAD. There have however been short-term drivers supporting prices and has kept the CAD more supported than we would have expected. 3. Global Risk Outlook As a high-beta currency, the CAD usually benefits from overall positive risk sentiment as well as environments that benefit pro-cyclical assets. Thus, both short-term (immediate) and med-term (underlying) risk sentiment will always be a key consideration for the CAD. 4. CFTC Analysis Latest CFTC data showed a positioning change of +14868 with a net non-commercial position of +7492. We think the recent price action and positioning data has seen the CAD take a very similar path compared to April and Oct 2021 where markets were way too aggressive to price in upside for the CAD only to see majority of it unwind. We think the CAD is setting up for a similar disappointment with money markets way too aggressive on rate expectations for 2022, and the BoC will be a key test for the currency this week. 5. The Week Ahead The main event for the CAD this week is the BoC meeting scheduled for Wednesday. From the start of the year, we’ve been growing more concerned with the CAD as money markets have been ramping up hike bets for the bank with 6 hikes priced for 2022 and a surprise 25bsp hike priced at an >80% probability at this week’s meeting. Have oil prices supported the CAD? Yes. Have the data been decent? Yes. However, recent data and oil prices does not mean the bank will suddenly have changed their mind about the output gap being closed, especially with the recently announced Omicron restrictions. Thus, if the bank was concerned about growth just a month ago, it’s unlikely that the picture changed drastically enough for the bank to hike rates this week. Thus, we think the overly aggressive hike bets means there is a very high bar for the BoC to surprise the market on the hawkish side, and means we see a higher chance for downside than upside for the CAD, unless the bank delivers a surprise 25bsp hike this week.

Today’s Notable Sentiment Shifts AUD – The Australian dollar got a much-needed lift on Thursday after a resoundingly strong set of jobs data reinforced market wagers on an early rise in interest rates, keeping short-term bond yields up at three-month highs. Following the report, Capital Economics noted that “the upshot is that the labour market is now at its tightest in years, and the continued rise in job vacancies suggests it is set to tighten further in the months ahead.” Consequently, Capital Economics expect the RBA to cease it’s A$4 billion per week bond purchase programme as soon as its February meeting.

AUD CAD - FUNDAMENTAL DRIVERS AUD FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy In Dec the RBA kept rates at 0.10% and weekly bond purchases at A$4bln until mid-Feb, as expected. They reiterated their commitment to maintain highly supportive monetary conditions and won’t raise rates until actual inflation is sustainably within their 2%-3% target range. They noted that the economy is recovering from the Delta slowdown and is expected to return to pre-Delta path in 1H22. The positive take from the meeting was that the RBA did not think Omicron will derail the expected recovery and sounded more optimistic than markets anticipated. They also said they will consider the future of their QE program at the Feb meeting and outlined their criteria for that which includes actions of other central banks, bond market functioning and actual and expected progress towards the goals of full employment and inflation consistent with their target. All in all, the bank still had a dovish stance but was more optimistic about the economy than expected. Furthermore, out of the 3 criteria set by the bank, the first two is arguably a green light already, which means the only thing we are waiting for is incoming employment and inflation data to see whether it’s good enough to stop QE. 2. Idiosyncratic Drivers & Intermarket Analysis There are 4 key drivers we’re watching for Australia’s med-term outlook: The virus situation – so far, the RBA has been positive about a post-Delta recovery, but incoming employment and inflation data will be crucial to see whether that optimism is justified. China – Even though the PBoC has finally stepped up with new stimulus & some fiscal support is expected in 1H22, the Covid-Zero policy in China does pose a risk to their expected 2022 recovery so the recent rapid rise in cases is one to watch. Politically, the AUKUS defence pact could see possible retaliation from China against Australian goods and is always something to keep on the radar. Commodities – Iron Ore, (24% of exports) and Coal prices (18% of exports) are important for terms of trade, and with both pushing higher on PBoC easing, that is a positive for the AUD as long as they maintain their recent push higher. Global growth – as a risk proxy, the global economy is an important consideration for AUD, which means the expected slowdown in growth and inflation globally is an important point to consider, but if China can put in a solid year that should limit the fall out if the global economy slows faster than expected. 3. Global Risk Outlook As a high-beta currency, the AUD usually benefits from overall positive risk sentiment as well as environments that benefit pro-cyclical assets. Thus, both short-term (immediate) and med-term (underlying) risk sentiment will always be a key consideration for the AUD. 4. CFTC Analysis Latest CFTC data showed positioning change of -2120 with a net non-commercial position of -91486. As outsized net-shorts are usually seen as a contrarian indicator we want to be mindful of potential squeezes higher for the AUD, which also means that the AUD is most likely going to be more sensitive to positive data compared to negative data because a lot of the bad news associated with the currency has arguably been priced in. The recent downside in equities have seen an additional increase in AUD net-shorts with the positioning hitting a new record low which means the risk to reward of chasing the AUD lower from here isn’t very attractive. 5. The Week Ahead The most important data point for the AUD in the week ahead is the upcoming employment data scheduled for Thursday. Recall that the RBA gave us three criteria they will be watching to determine the future of their asset purchase program, and with 2 of those 3 criteria arguable already confirmed, the only thing left is the economic data. Market consensus is looking for a much lower number in Dec (43.3K) compared to the massive surprise beat in Nov (366K) and expect the Unemployment Rate to drop to 4.5% from the prior of 4.6%. A solid beat in the data should see markets pricing in a higher probability that the RBA announces an end to their QE program at the Feb meeting and could see some of that very stretched net-short positioning seeing a bigger unwind. Alternatively, money markets have been very aggressive in their policy expectations for the RBA with 4 hikes priced by the end of the year, which means a much bigger than expected miss could see some of that pushed out to 2023 as a delayed end of QE means less optionality for the RBA later in the year. CAD FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy In Dec the BoC left rates at 0.25% as expected and maintained forward guidance where it expects rates at current levels until the middle quarters of 2022. This disappointed some participants who were looking for the bank to announce that the output gap could be closed in 1Q22. On inflation , even though the bank still thinks it will ease from 2H22, they did drop ‘temporary’ when referring to price pressures, similar to the Fed’s removing the word ‘transitory’. The bank took a slightly bleaker view on growth, pointing to both the new Omicron variant and flooding in British Columbia as possibly drags on growth and something that could elevate supply chain issues. What disappointed markets a bit was that the bank said none of the recent developments warrants any further adjustments to normalization, which disappointed the bulls looking for a possible hawkish tilt. The bank noted that employment is back to pre-covid levels, and economic momentum in Q4 were solid, but the overall tone wasn’t enough to convince markets of a Jan hike at that time, but markets have since then continued to ramp up hike bets with money markets pricing in a >70% chance of a hike at the Jan meeting and pricing in close to 6 hikes for 2022. Keep in mind that the bank was already concerned about growth before the recent Omicron restrictions, which means the likelihood of them brining forward output gap projections seems unlikely and for that reason we think is setting up for a disappointment and possible repricing lower in money market expectations in the upcoming meetings. 2. Intermarket Analysis Considerations Oil’s massive post-covid recovery has been impressive, driven by three drivers: supply & demand (OPEC’s production cuts); improving global economic outlook and improving oil demand outlook, even though slightly pushed back by Delta concerns; higher for longer than expected inflation . Even though Oil has recovered a lot of its recent downside and have proven our caution wrong, we are still cautious going into the first two quarters. The drivers keeping us cautious is expectations of a more hawkish Fed, slowing growth and inflation , lower inflation expectations (due to the Fed) and a possible supply surplus in 1Q22. If our concerns do materialize into downside for oil prices it should put pressure on the CAD. There have however been shortterm drivers supporting Oil prices and has kept the CAD more supported than we would have expected. 3. Global Risk Outlook As a high-beta currency, the CAD usually benefits from overall positive risk sentiment as well as environments that benefit pro-cyclical assets. Thus, both short-term (immediate) and med-term (underlying) risk sentiment will always be a key consideration for the CAD. 4. CFTC Analysis Latest CFTC data showed a positioning change of +3649 with a net non-commercial position of -7376. Recent price action has seen the CAD take a very similar path compared to April and Oct 2021 where markets were way too aggressive to price in upside for the CAD only to see majority of it unwind. We think the CAD is setting up for a similar disappointment with money markets way too aggressive on rate expectations for 2022.

USD CAD - FUNDAMENTAL DRIVERS USD FUNDAMENTAL BIAS: BULLISH 1. Monetary Policy The Fed turned a lot more hawkish than expected in Dec. They doubled the pace of tapering to $30 billion per month which will see QE concluded by March 2022 as was widely expected. Surprisingly though the Summary of Econ Projections showed the median dot plot pencilled in 3 hikes for 2022 (up from the previous 1), confirming Fed Fund Future expectations. Fed Chair Powell explained they hadn’t decided whether to pause between the end of tapering and a first hike but reiterated that rates will likely only rise when QE has concluded. Another positive shift was Powell’s comments that they could raise rates before full employment has been met due to high inflation , and stated that with inflation above target, they cannot wait too long to get to maximum employment as current inflation levels is seen as a threat to max employment. The hawkish tilt went further to note that the bank started discussing the balance sheet but said no decisions were made on when QT might commence. Even though the dots projected 3 hikes for 2022, the updated rate trajectory only showed 1 additional hike over the forecast horizon, which combined with a lower terminal rate was less hawkish than some had feared. Nonetheless, the meeting marked a material hawkish shift from the Fed, putting it on par with the likes of the RBNZ. The meeting minutes also revealed that the QT discussion saw majority of members thinking it appropriate to start QT soon after rate lift off and another more hawkish tilt than expected from the Fed. 2. Global Risk Outlook The growth & inflation outlook will be key for the USD, not only growth and inflation in the US but also global. The USD is often inversely correlated to global growth & inflation , doing bad during reflationary environments (growth and inflation accelerating), while the USD usually does well in disinflationary environments (growth and inflation decelerating). Thus, with expectations that both growth and inflation will decelerate this year, both in the US and the globe, that should be a positive input for the USD in the med-term . However, it also means there will be a lot of focus on the incoming data to see how it develops and how the Fed responds to it. For example, if the economic outlook worsens materially, the Fed could backtrack on their current aggressive path, which could mean downside for the USD if money markets start pricing out hikes, so incoming data is key. 3. CFTC Analysis Latest CFTC data showed a positioning change of -1186 with a net non-commercial position of +37892. The shortterm unwinding of stretched USD longs played out exactly as expected. Even though the CFTC data does not show a big unwind we need to remember the big downside move in the USD started on Wednesday, which means last week’s COT data will not include any of that, so take this week’s data with a pinch of salt. With the fundamental bias unchanged, the real question is whether the flush we saw this past week is over. 4. The Week Ahead In the week ahead, things will be very quiet on the data front for the US, with US participants also away on Monday for a bank holiday. Thus, a lot of the Dollar’s flow will be dictated by overall risk sentiment, key events for other major currencies, and of course focus on whether the bond and equity market continue to provide mixed signals on the growth and inflation outlook in the midst of the Fed’s current aggressive policy path. With markets pricing in well over 3 hikes for the Fed this year already, there is arguably still a lot of disappointment for money markets on this front if the economic picture starts to rapidly deteriorate. Even though that could add pressure to the USD as positioning gets squared up, keep in mind that a disinflationary environment is also usually USD positive, which means the path in the very short-term for the USD is less clear than we would have hoped it to be. In the week ahead the key technical levels to watch is key support between 94.70 and 94.50. We spoke about the importance of these levels a couple of times this past week and saw a solid bounce from that zone on Friday. A continuation of that bounce arguably opens up a retest of previous key support around 95.60, however if we push lower and take out key support it opens up for a move towards 93. 40 , so we are at a very important juncture right now from a technical and momentum perspective. CAD FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy In Dec the BoC left rates at 0.25% as expected and maintained forward guidance where it expects rates at current levels until the middle quarters of 2022. This disappointed some participants who were looking for the bank to announce that the output gap could be closed in 1Q22. On inflation, even though the bank still thinks it will ease from 2H22, they did drop ‘temporary’ when referring to price pressures, similar to the Fed’s removing the word ‘transitory’. The bank took a slightly bleaker view on growth, pointing to both the new Omicron variant and flooding in British Columbia as possibly drags on growth and something that could elevate supply chain issues. What disappointed markets a bit was that the bank said none of the recent developments warrants any further adjustments to normalization, which disappointed the bulls looking for a possible hawkish tilt. The bank noted that employment is back to pre-covid levels, and economic momentum in Q4 were solid, but the overall tone wasn’t enough to convince markets of a Jan hike at that time, but markets have since then continued to ramp up hike bets with money markets pricing in a >70% chance of a hike at the Jan meeting and pricing in close to 6 hikes for 2022. Keep in mind that the bank was already concerned about growth before the recent Omicron restrictions, which means the likelihood of them brining forward output gap projections seems unlikely and for that reason we think is setting up for a disappointment and possible repricing lower in money market expectations in the upcoming meetings. 2. Intermarket Analysis Considerations Oil’s massive post-covid recovery has been impressive, driven by three drivers: supply & demand (OPEC’s production cuts); improving global economic outlook and improving oil demand outlook, even though slightly pushed back by Delta concerns; higher for longer than expected inflation. Even though Oil has recovered a lot of its recent downside and have proven our caution wrong, we are still cautious going into the first two quarters. The drivers keeping us cautious is expectations of a more hawkish Fed, slowing growth and inflation, lower inflation expectations (due to the Fed) and a possible supply surplus in 1Q22. If our concerns do materialize into downside for oil prices it should put pressure on the CAD. There have however been shortterm drivers supporting Oil prices and has kept the CAD more supported than we would have expected. 3. Global Risk Outlook As a high-beta currency, the CAD usually benefits from overall positive risk sentiment as well as environments that benefit pro-cyclical assets. Thus, both short-term (immediate) and med-term (underlying) risk sentiment will always be a key consideration for the CAD. 4. CFTC Analysis Latest CFTC data showed a positioning change of +3649 with a net non-commercial position of -7376. Recent price action has seen the CAD take a very similar path compared to April and Oct 2021 where markets were way too aggressive to price in upside for the CAD only to see majority of it unwind. We think the CAD is setting up for a similar disappointment with money markets way too aggressive on rate expectations for 2022. 5. The Week Ahead In the week ahead the main event we’ll be watching for the CAD is Wednesday’s CPI data. The aggressive pivot from the Fed has seen markets pricing in a potential similar pivot for the BoC, but that seems unlikely for a few reasons. Firstly, as noted above the output gap projections are unlike to have changed between now and December, with the higher probability that the bank sounds even more cautious on growth with the recent Omicron restrictions only coming online after their Dec meeting (if growth already was a concern before that, it seems strange that they would suddenly see a brighter outlook after more restrictions were implemented). Secondly, and in connection with this week’s CPI, Canada does not have the same price pressure compared to the US (with US Core CPI sitting at 5.4% and the average of the BoC’s preferred measure of Core CPI sitting at 2.74%. That means CPI will be important this week, because if we see yet another uninspiring print this week, that should see some of the aggressive policy bets unwind and would be a negative input for the CAD. At the same time, even if we see a beat, with almost 6 hikes already priced, what more can the market price in?

DXY - FUNDAMENTAL DRIVERS USD FUNDAMENTAL BIAS: BULLISH 1. Monetary Policy The Fed turned a lot more hawkish than expected in Dec. They doubled the pace of tapering to $30 billion per month which will see QE concluded by March 2022 as was widely expected. Surprisingly though the Summary of Econ Projections showed the median dot plot pencilled in 3 hikes for 2022 (up from the previous 1), confirming Fed Fund Future expectations. Fed Chair Powell explained they hadn’t decided whether to pause between the end of tapering and a first hike but reiterated that rates will likely only rise when QE has concluded. Another positive shift was Powell’s comments that they could raise rates before full employment has been met due to high inflation, and stated that with inflation above target, they cannot wait too long to get to maximum employment as current inflation levels is seen as a threat to max employment. The hawkish tilt went further to note that the bank started discussing the balance sheet but said no decisions were made on when QT might commence. Even though the dots projected 3 hikes for 2022, the updated rate trajectory only showed 1 additional hike over the forecast horizon, which combined with a lower terminal rate was less hawkish than some had feared. Nonetheless, the meeting marked a material hawkish shift from the Fed, putting it on par with the likes of the RBNZ. The meeting minutes also revealed that the QT discussion saw majority of members thinking it appropriate to start QT soon after rate lift off and another more hawkish tilt than expected from the Fed. 2. Global Risk Outlook The growth & inflation outlook will be key for the USD, not only growth and inflation in the US but also global. The USD is often inversely correlated to global growth & inflation, doing bad during reflationary environments (growth and inflation accelerating), while the USD usually does well in disinflationary environments (growth and inflation decelerating). Thus, with expectations that both growth and inflation will decelerate this year, both in the US and the globe, that should be a positive input for the USD in the med-term. However, it also means there will be a lot of focus on the incoming data to see how it develops and how the Fed responds to it. For example, if the economic outlook worsens materially, the Fed could backtrack on their current aggressive path, which could mean downside for the USD if money markets start pricing out hikes, so incoming data is key. 3. CFTC Analysis Latest CFTC data showed a positioning change of -1186 with a net non-commercial position of +37892. The shortterm unwinding of stretched USD longs played out exactly as expected. Even though the CFTC data does not show a big unwind we need to remember the big downside move in the USD started on Wednesday, which means last week’s COT data will not include any of that, so take this week’s data with a pinch of salt. With the fundamental bias unchanged, the real question is whether the flush we saw this past week is over. 4. The Week Ahead In the week ahead, things will be very quiet on the data front for the US, with US participants also away on Monday for a bank holiday. Thus, a lot of the Dollar’s flow will be dictated by overall risk sentiment, key events for other major currencies, and of course focus on whether the bond and equity market continue to provide mixed signals on the growth and inflation outlook in the midst of the Fed’s current aggressive policy path. With markets pricing in well over 3 hikes for the Fed this year already, there is arguably still a lot of disappointment for money markets on this front if the economic picture starts to rapidly deteriorate. Even though that could add pressure to the USD as positioning gets squared up, keep in mind that a disinflationary environment is also usually USD positive, which means the path in the very short-term for the USD is less clear than we would have hoped it to be. In the week ahead the key technical levels to watch is key support between 94.70 and 94.50. We spoke about the importance of these levels a couple of times this past week and saw a solid bounce from that zone on Friday. A continuation of that bounce arguably opens up a retest of previous key support around 95.60, however if we push lower and take out key support it opens up for a move towards 93.40, so we are at a very important juncture right now from a technical and momentum perspective.

USD CAD - FUNDAMENTAL DRIVERS USD FUNDAMENTAL BIAS: BULLISH 1. Monetary Policy A lot more hawkish than expected is how the Fed’s Dec decision can be summed up. The Fed doubled the pace of tapering to $30 billion per month which will see the QE program conclude by March 2022 as was widely expected. The big change came from the updated Summary of Econ Projections where the median dot plot pencilled in 3 hikes for the Fed next year (up from just shy of 1 hike projected just 3 months ago), confirming money market and Fed Fund Future expectations. Fed Chair Powell explained they hadn’t decided whether to pause between the end of tapering and a first hike but reiterated that rates will likely only rise when the taper has concluded. Another positive shift was Powell’s comments that the balance of goals means it could possibly raise rates before full employment has been met due to high inflation , and also stated that with inflation above target, they cannot wait too long to get to maximum employment with current levels of inflation described as a threat to full employment. The hawkish tilt even went so far that the bank started to discuss the balance sheet but said they didn't make any decisions on when the balance sheet would shrink. Even though the dots projected 3 hikes for 2022, the updated rate hike trajectory only showed 1 additional hike over the forecast horizon, which combined with a lower terminal rate was less hawkish than some had feared. Nonetheless, with this recent meeting the Fed is now the second most hawkish CB after the RBNZ and should be supportive for the USD in the med-term . This past week’s meeting minutes also revealed that the bank has started discussing QT with majority of members thinking it’s appropriate to start QT soon after rate lift off which was a much more hawkish tilt than expected from the Fed. 2. Real Yields With the hawkish tilt from the Fed, it should see breakeven inflation rates fall faster than US10Y as a more aggressive Fed should see med-term growth & inflation expectations fall. Rising real yields should be good for the USD as well and one to keep on the radar, especially after this weeks divergence. 3. Global Risk Outlook What happens to growth and inflation this year will be key for the USD, not only growth and inflation in the US though but also on a global scale. The USD usually does bad in reflationary environments (where growth and inflation accelerates globally), while the USD usually does very well when growth and inflation decelerates globally). So, expectations that we are seeing a slowdown in both of them globally should be a positive input for the USD in the med-term . However, it also means there will be a lot of focus on the incoming data to see how it develops. 4. CFTC Analysis Latest CFTC data showed a positioning change of +2289 with a net non-commercial position of +39078. With large specs net-longs close to 2019 highs and leverage funds USD longs also looking stretched, and with a lot of the Fed hawkishness arguably priced in, the USD has been looking vulnerable to some unwinding, which is what we saw this past week. Even though the Fed remains on a hawkish path (for now) and the USD remains bullish from a fundamental outlook point of view, with positioning where it is right now, any recovery in risk sentiment or bad economic data in the US relative to the rest of the world could continue to add some pressure on the Greenback in the short-term. However, it will take a lot to change the overall fundamental bullish outlook given what markets are expecting from 2022. CAD FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy In Dec the BoC left rates at 0.25% as expected and maintained forward guidance where it expects rates at current levels until the middle quarters of 2022. Even though the bank still thinks inflation will ease from 2H22, they did drop the term "temporary" when referring to price pressures, similar to the Fed’s drop of the word transitory. The bank took a slightly bleaker view on growth, pointing to both the new Omicron variant and flooding in British Columbia as possibly drags on growth and something that could elevate supply chain issues. What disappointed markets a bit was that the bank said none of the recent developments warrants any further adjustments to normalization, which disappointed the bulls looking for a possible hawkish tilt. The bank noted that employment is back to pre-covid levels, and economic momentum in Q4 were solid, but the overall tone wasn’t enough to convince markets of a 1Q22 hike, with market odds at roughly 50/50 for the Jan meeting. The recent Omicron restrictions is expected to hit growth in the first quarter, which means a hike in quarter 2 is more likely as the bank would arguably not be in too much of a hurry to turn overly aggressive given the divergence between the divergent government response to Omicron between the US and the BoC . Thus, we think the bank holds off with hikes until 2Q22, which means some of those aggressive policy bets (markets pricing in very close to 5 hikes for this year this past week) will arguably need to be pushed back and repriced. 2. Intermarket Analysis Considerations Oil’s massive post-covid recovery has been impressive, driven by three drivers: supply & demand (OPEC’s production cuts); improving global economic outlook and improving oil demand outlook, even though slightly pushed back by Delta concerns; higher for longer than expected inflation . Even though Oil has recovered a lot of its recent downside and have proven our caution wrong, we are still cautious going into the first two quarters. The drivers keeping us cautious on oil right now is expectations of a more hawkish Fed, slowing growth and inflation , and a possible supply surplus in 1Q22. If our concerns do materialize into downside for oil prices it should put pressure on the CAD. Recent supply constraints in Kazakhstan and Libya has aided oil this past week (alongside some higher inflation inputs), and if that continues it could provide continued short-term support for Oil though so worth keeping that in mind. 3. Global Risk Outlook As a high-beta currency, the CAD benefited from the market's 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 reflation and post-recession recovery best. 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 recent short-term jitters are a timely reminder that risk sentiment is also a very important short-term driver. 4. CFTC Analysis Latest CFTC data showed a positioning change of -691 with a net non-commercial position of -11025. A lot of the previous froth priced into the CAD has arguably been reduced. However, given our concerns about Oil as well as the bar for an aggressive policy response from the BoC looking less certain, we do think there is chance of some additional repricing for the CAD going into 2022, which is why we’ve shifted our fundamental outlook to neutral from weak bullish .

NZD USD - FUNDAMENTAL DRIVERS NZD FUNDAMENTAL BIAS: WEAK BULLISH 1. Monetary Policy The RBNZ underwhelmed some market participants who were looking for a 50bsp hike as the bank only delivered on a 25bsp hike as consensus was expecting. Even though the NZD took a plunge after the meeting, we don’t think markets are really giving NZD the upside it deserves after the Nov RBNZ decision. Not referring to the knee-jerk lower after the 25bsp hike of course as that was fully priced in and always ran the risk of underwhelming the bulls, but the outlook in the MPR justifies more NZD strength. The upgrades to the economic outlook between Aug and Nov was positive, with growth seen lower in 2022 but much higher in 2023, CPI is seen higher throughout 2022 and 2023, the Unemployment rate seen lower throughout the forecast horizon, and of course the big upgrade to the OCR which is now seen at 2.6% by 2024, and the bank has brought forward their expectation of reaching the 2.0% neutral rate with 5 quarters. Of course, incoming data will be important (as always) and any new developments with the new Omicron variant will be watched. But barring any major deterioration in the econ data, the recent sell off in the NZD does seem at odds with the fundamental, policy and economic outlook. 2. Economic and health developments Even though the NZ government has abandoned a covid-zero strategy, a ramp in Omicron cases can of course see further restrictions being announced if things get serious so the virus is worth keeping on the radar. Turning to the economic data, the recent macro data has been much better than both the markets and the RBNZ had expected, but markets have not been too bothered with the incoming data and have not given the NZD the upside it deserves in our opinion. For now, based on the economic and policy outlook the NZD still seems undervalued at current prices, but we need to keep close track of the overall risk sentiment given the associated risks of the new variant. 3. Global Risk Outlook As a high-beta currency, the NZD benefited from the market's 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 reflation and post-recession recovery best. If expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the NZD in the med-term, but recent short-term jitters are a timely reminder that risk sentiment is also a very important short-term driver. 4. CFTC Analysis Latest CFTC data showed a positioning change of -424 with a net non-commercial position of -8845. Positioning changes in the past 3 to 4 weeks have shown that a lot of the previous optimism about the NZD was unwound, especially for leveraged funds. Do we think the NZD should be higher? Yes, we do, but markets have not been having it for the past few weeks. For now, it might be best to wait for incoming economic and virus data to provide us with short-term catalysts before we engage the currency back to the upside. USD FUNDAMENTAL BIAS: BULLISH 1. Monetary Policy A lot more hawkish than expected is how the Fed’s Dec decision can be summed up. The Fed doubled the pace of tapering to $30 billion per month which will see the QE program conclude by March 2022 as was widely expected. The big change came from the updated Summary of Econ Projections where the median dot plot pencilled in 3 hikes for the Fed next year (up from just shy of 1 hike projected just 3 months ago), confirming money market and Fed Fund Future expectations. Fed Chair Powell explained they hadn’t decided whether to pause between the end of tapering and a first hike but reiterated that rates will likely only rise when the taper has concluded. Another positive shift was Powell’s comments that the balance of goals means it could possibly raise rates before full employment has been met due to high inflation , and also stated that with inflation above target, they cannot wait too long to get to maximum employment with current levels of inflation described as a threat to full employment. The hawkish tilt even went so far that the bank started to discuss the balance sheet but said they didn't make any decisions on when the balance sheet would shrink. Even though the dots projected 3 hikes for 2022, the updated rate hike trajectory only showed 1 additional hike over the forecast horizon, which combined with a lower terminal rate was less hawkish than some had feared. Nonetheless, with this recent meeting the Fed is now the second most hawkish CB after the RBNZ and should be supportive for the USD in the med-term . This past week’s meeting minutes also revealed that the bank has started discussing QT with majority of members thinking it’s appropriate to start QT soon after rate lift off which was a much more hawkish tilt than expected from the Fed. 2. Real Yields With the hawkish tilt from the Fed, it should see breakeven inflation rates fall faster than US10Y as a more aggressive Fed should see med-term growth & inflation expectations fall. Rising real yields should be good for the USD as well and one to keep on the radar, especially after this weeks divergence. 3. Global Risk Outlook What happens to growth and inflation this year will be key for the USD, not only growth and inflation in the US though but also on a global scale. The USD usually does bad in reflationary environments (where growth and inflation accelerates globally), while the USD usually does very well when growth and inflation decelerates globally). So, expectations that we are seeing a slowdown in both of them globally should be a positive input for the USD in the med-term . However, it also means there will be a lot of focus on the incoming data to see how it develops. 4. CFTC Analysis Latest CFTC data showed a positioning change of +2289 with a net non-commercial position of +39078. With large specs net-longs close to 2019 highs and leverage funds USD longs also looking stretched, and with a lot of the Fed hawkishness arguably priced in, the USD has been looking vulnerable to some unwinding, which is what we saw this past week. Even though the Fed remains on a hawkish path (for now) and the USD remains bullish from a fundamental outlook point of view, with positioning where it is right now, any recovery in risk sentiment or bad economic data in the US relative to the rest of the world could continue to add some pressure on the Greenback in the short-term. However, it will take a lot to change the overall fundamental bullish outlook given what markets are expecting from 2022.

EUR USD - FUNDAMENTAL DRIVERS EUR FUNDAMENTAL BIAS: BEARISH 1. Monetary Policy Less dovish than expected can some of the ECB Dec pol decision. As expected, the bank announced that PEPP will discontinue from March 2022, but they announced a surprise decline monthly purchases under the APP, which will see purchases increased to EUR 40bln from EUR 20bln from2Q22 and then subsequently lowered to EUR 30bln in Q3 and down to EUR 20bln in 4Q22. Markets were not expecting any reduced purchases under the PEPP, so expecting the APP amount to return to EUR 20 billion by end next year was less dovish than expected. On inflation there was no surprises with updated staff econ projections showed 2023 HICP at 1.8% which reiterated the bank’s view that inflation will return to below target in the med-term. President Lagarde struck a familiar tone regarding rates by reaffirming that rates are unlikely to rise next year. As usually ECB sources provided more colour after the meeting by showing further disagreements among the GC regarding with the hawks unhappy with extending PEPP reinvestments to 2024 and not setting an end-date to the APP, and of course disagreed that inflation risks as skewed higher. Overall, the bank was less dovish than expected but the stark policy divergence between the ECB and the likes of the Fed and BoE means the bias for the EUR remains tilted lower in the med-term. 2. Economic & Health Developments Even though the recent activity data suggests the hit to the economy from previous lockdowns weren’t as bad as feared, the massive climb in case numbers across Europe (including Omicron cases) have seen more restrictive measures which will drag on growth. Further lockdown measures will probably see a further divergence in growth differentials between the EU and other major economies (and combined with ongoing central bank policy divergence) the fundamental outlook remains bearish for the EUR. On the fiscal front, attention is still on ongoing discussions among EU states to potentially allow the purchase of green bonds NOT to count against budget deficits. Such a decision could drastically change the fiscal picture and we would expect it to be a big positive for the EUR and EU equities if that change should come to pass. 3. Funding Characteristics As a low yielder (like JPY & CHF), the EUR has been a funding choice among carry trades, especially during 2019 where it was a favourite against high yielding EM. Also, part of the EUR upside in the initial risk-off scare in March 2020 was attributed to an unwind of large carry trades. Recently the EUR has exhibited some resilience during risk off tones. As more central banks start normalizing policy, the EUR’s use as a funder could add additional pressure in the med-term. But it could also spark risk off upside if some of those trades unwind. 4. CFTC Analysis Latest CFTC data showed a positioning change of +5080 with a net non-commercial position of -1554. Even though positioning isn’t stretched on the large speculator side, it’s a different story for leveraged funds which is still sitting on the biggest net-short for the majors. That means watching key technical levels to the upside such as 1.1380 for possible squeezes will be important in the week ahead. USD FUNDAMENTAL BIAS: BULLISH 1. Monetary Policy A lot more hawkish than expected is how the Fed’s Dec decision can be summed up. The Fed doubled the pace of tapering to $30 billion per month which will see the QE program conclude by March 2022 as was widely expected. The big change came from the updated Summary of Econ Projections where the median dot plot pencilled in 3 hikes for the Fed next year (up from just shy of 1 hike projected just 3 months ago), confirming money market and Fed Fund Future expectations. Fed Chair Powell explained they hadn’t decided whether to pause between the end of tapering and a first hike but reiterated that rates will likely only rise when the taper has concluded. Another positive shift was Powell’s comments that the balance of goals means it could possibly raise rates before full employment has been met due to high inflation, and also stated that with inflation above target, they cannot wait too long to get to maximum employment with current levels of inflation described as a threat to full employment. The hawkish tilt even went so far that the bank started to discuss the balance sheet but said they didn't make any decisions on when the balance sheet would shrink. Even though the dots projected 3 hikes for 2022, the updated rate hike trajectory only showed 1 additional hike over the forecast horizon, which combined with a lower terminal rate was less hawkish than some had feared. Nonetheless, with this recent meeting the Fed is now the second most hawkish CB after the RBNZ and should be supportive for the USD in the med-term. This past week’s meeting minutes also revealed that the bank has started discussing QT with majority of members thinking it’s appropriate to start QT soon after rate lift off which was a much more hawkish tilt than expected from the Fed. 2. Real Yields With the hawkish tilt from the Fed, it should see breakeven inflation rates fall faster than US10Y as a more aggressive Fed should see med-term growth & inflation expectations fall. Rising real yields should be good for the USD as well and one to keep on the radar, especially after this weeks divergence. 3. Global Risk Outlook What happens to growth and inflation this year will be key for the USD, not only growth and inflation in the US though but also on a global scale. The USD usually does bad in reflationary environments (where growth and inflation accelerates globally), while the USD usually does very well when growth and inflation decelerates globally). So, expectations that we are seeing a slowdown in both of them globally should be a positive input for the USD in the med-term. However, it also means there will be a lot of focus on the incoming data to see how it develops. 4. CFTC Analysis Latest CFTC data showed a positioning change of +2289 with a net non-commercial position of +39078. With large specs net-longs close to 2019 highs and leverage funds USD longs also looking stretched, and with a lot of the Fed hawkishness arguably priced in, the USD has been looking vulnerable to some unwinding, which is what we saw this past week. Even though the Fed remains on a hawkish path (for now) and the USD remains bullish from a fundamental outlook point of view, with positioning where it is right now, any recovery in risk sentiment or bad economic data in the US relative to the rest of the world could continue to add some pressure on the Greenback in the short-term. However, it will take a lot to change the overall fundamental bullish outlook given what markets are expecting from 2022.

Today’s Notable Sentiment Shifts USD – The dollar extended its fall on Thursday to a two-month low due to position unwinding following this week’s CPI report, which fell short of offering any new impetus for the Federal Reserve’s policy normalization efforts. TD Securities summarized that “coming into the new year the dollar positioning was very much skewed to being long. Yesterday’s inflation numbers, in conjunction with Powell’s testimony for his nomination hearing, were basically just in line with markets had already positioned for. There wasn’t anything materially new.” Adding that “once we got through that $1.14 (EURUSD) level, momentum players likely flipped to sell dollars on that move.”

Today’s Notable Sentiment Shifts USD – The dollar edged lower on Tuesday after Fed Chair Powell’s testimony signaled that while the Fed will be normalizing policy, it has not made a decision on reducing its nearly $9 trillion balance sheet. Commenting on Powell’s testimony, Cambridge Global Payments noted that “Powell defied the hawkish commentary of others on the Fed’s rate-setting committee, suggesting that a quantitative tightening decision will come in the next two to four meetings, with bonds allowed to roll off in an organic manner – as opposed to actively selling securities into the market. This is lifting global risk appetite and spurring flows into yield sensitive currencies like the Canadian dollar.”

Today’s Notable Sentiment Shifts USD – The dollar edged higher against a basket of currencies on Monday as recent employment data prompted some Wall Street banks to raise their estimates for how quickly the Federal Reserve will raise interest rates this year. Among those banks which raised their FOMC projections are Goldman Sachs, J.P. Morgan, Deutsch Bank and Jefferies, with the latter stating that “with the unemployment rate below 4% the Fed could probably declare their job on employment “completed” which does indeed set us for an even faster period of taper potentially.”

CAD JPY - FUNDAMENTAL DRIVERS CAD FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy In Dec the BoC left rates at 0.25% as expected and maintained forward guidance where it expects rates at current levels until the middle quarters of 2022. Even though the bank still thinks inflation will ease from 2H22, they did drop the term "temporary" when referring to price pressures, similar to the Fed’s drop of the word transitory. The bank took a slightly bleaker view on growth, pointing to both the new Omicron variant and flooding in British Columbia as possibly drags on growth and something that could elevate supply chain issues. What disappointed markets a bit was that the bank said none of the recent developments warrants any further adjustments to normalization, which disappointed the bulls looking for a possible hawkish tilt. The bank noted that employment is back to pre-covid levels, and economic momentum in Q4 were solid, but the overall tone wasn’t enough to convince markets of a 1Q22 hike, with market odds at roughly 50/50 for the Jan meeting. The recent Omicron restrictions is expected to hit growth in the first quarter, which means a hike in quarter 2 is more likely as the bank would arguably not be in too much of a hurry to turn overly aggressive given the divergence between the divergent government response to Omicron between the US and the BoC . Thus, we think the bank holds off with hikes until 2Q22, which means some of those aggressive policy bets (markets pricing in very close to 5 hikes for this year this past week) will arguably need to be pushed back and repriced. 2. Intermarket Analysis Considerations Oil’s massive post-covid recovery has been impressive, driven by three drivers: supply & demand (OPEC’s production cuts); improving global economic outlook and improving oil demand outlook, even though slightly pushed back by Delta concerns; higher for longer than expected inflation . Even though Oil has recovered a lot of its recent downside and have proven our caution wrong, we are still cautious going into the first two quarters. The drivers keeping us cautious on oil right now is expectations of a more hawkish Fed, slowing growth and inflation , and a possible supply surplus in 1Q22. If our concerns do materialize into downside for oil prices it should put pressure on the CAD. Recent supply constraints in Kazakhstan and Libya has aided oil this past week (alongside some higher inflation inputs), and if that continues it could provide continued short-term support for Oil though so worth keeping that in mind. 3. Global Risk Outlook As a high-beta currency, the CAD benefited from the market's 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 reflation and post-recession recovery best. 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 recent short-term jitters are a timely reminder that risk sentiment is also a very important short-term driver. 4. CFTC Analysis Latest CFTC data showed a positioning change of -691 with a net non-commercial position of -11025. A lot of the previous froth priced into the CAD has arguably been reduced. However, given our concerns about Oil as well as the bar for an aggressive policy response from the BoC looking less certain, we do think there is chance of some additional repricing for the CAD going into 2022, which is why we’ve shifted our fundamental outlook to neutral from weak bullish . 5. The Week Ahead In the week ahead the calendar is very slim for the CAD with no tier 1 data points. The good jobs print on Friday provided some additional upside for the CAD, which had a decent start to the new year. However, as employment is often seen as a lagging indicator, as well as the newly announced covid restrictions in Canada, we do think the growth and employment situation in 1Q22 is facing some deterioration. For now, the markets have seemed comfortable with that and the CAD has been very resilient, but we are not sure how long that can continue. JPY FUNDAMENTAL BIAS: BEARISH 1. Monetary Policy At their Dec meeting the BoJ kept policy mostly unchanged apart from unanimously voting to scale back emergency pandemic relief funding from March which includes tapering corporate bond and commercial paper buying, but they did also vote to extend a portion of the pandemic relief loan scheme to March for smaller firms. As always, the BoJ said they are ready to add additional stimulus and easing steps as the economy needs it. The bank reiterated that even though the economy has picked up it does still remain in a severe situation due to the COVID-19. The bank remains dovish and is unlikely going to change anytime soon. 2. 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 for the JPY; and although monetary policy expectations can still prove marketmoving 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 ongoing monetary and fiscal policy support paved the way for markets to expect a robust global economic recovery. As the Fed and other banks start to normalize, we do need to remember that it means those fiscal and monetary policy support is being reduced, which could mean a lot more volatility for markets in the weeks and months ahead. Even though that doesn’t mean our med-term bias for the JPY has changed, it simply means that we should expect more risk sentiment ebbs and flows this year, and the heightened volatility can create some fantastic directional moves in the JPY, as long as yields play their part. 3. Low-yielding currency with inverse correlation to US10Y As a low yielding currency, the JPY usually shares a strong inverse correlation to 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 isn’t perfect and will ebb and flow depending on the type of market environment from both a risk and cycle point of view. With the Fed tilting more aggressive, we think that opens up more room for curve flattening to take place with US02Y likely pushing higher while US10Y underperform. In this environment we do see some mild upside risks for the JPY, but we should not look at the influence from yields in isolation and also weigh it up alongside underlying risk sentiment and price action in the USD of course. 4. CFTC Analysis Latest CFTC data showed a positioning change of -9160 with a net non-commercial position of -62262. Even though the JPY’s med-term outlook remains bearish , the big net-shorts for both large speculators and leveraged funds always increases the odds of more punchy safe haven flows and mean reversion when risk sentiment deteriorates. However, despite risk sentiment taking a hit in the past trading week, the JPY has remained pressured as the move in US yields kept any JPY rallies in check. 5. The Week Ahead In the week ahead the biggest focus for the JPY will be on overall risk sentiment with the big rally in risk sentiment going into the last few trading days of the year with S&P futures managing to squeeze out another all-time high and Nasdaq futures getting very close to doing the same. The big amount of upside has been mostly attributed to equities taking the path of least resistance ( med-term bias remains tilted higher) and moves was probably exacerbated by thinner liquidity and lower volumes. If that momentum can continue at the start of the new year, we can expect to see further downside for the safe haven JPY and will be a key focus for the currency for the week ahead. Apart from that, keeping an eye on US yields will be important as always.

GBP JPY - FUNDAMENTAL DRIVERS GBP FUNDAMENTAL BIAS: WEAK BULLISH Monetary Policy They did it again! After leading markets to believe that a Dec rate hike was looking unlikely the bank surprised by announcing a 15bsp rate hike. Recall we had external member Saunders (who voted for a hike in Nov) suggested there could be benefits in waiting before moving on rates until some of the uncertainty from Omicron dissipates. We also had BoE’s Mann a few days before the meeting saying it was premature to talk about hikes but ended up voting for a hike with an 8-1 vote split and BoE’s Tenreyro the only dissenter. The bank lost a lot of the credibility that it had left, but in the end, they did the right thing (in my opinion at least) to stay data dependent and hike given the recent flurry of much better-thanexpected econ data. The consensus view was that current price pressures warranted tighter policy in the near-term, with inflation expected to peak close to 6% in April (up from previous projections). One negative was of course growth which is expected to push lower given the Omicron variant and associated restrictions. For now, the bank’s move is a hawkish development for the GBP, with Omicron and incoming data key considerations for the rate outlook going forward (a 25bsp hike is fully priced for March). Economic & Health Developments Even though activity data has been slowing, the economy is not expected to fall off a cliff by any means. Growth expectations for 2022 still places the UK in front of the G7 which means growth differentials are still favourable for the GBP. It seems like the solid economic data (beats for CPI, Jobs, Retail Sales) were enough to convince the BoE to hike, and as long as the data remains firm it should keep the odds of additional tightening on the table. Focus now turns to Omicron to see how it impacts incoming data and affects the rate outlook going into 2022. Political Developments Even though a Brexit deal was reached last year, some issues like the Northern Ireland protocol remains, and with neither side willing to budge it seems like these issues are here to stay for now. There has been heated rhetoric from both sides with the UK threatening to trigger Article 16 and the EU threatening to terminate the Brexit deal if they do. For now, these are just threats, but any actual escalation could increase the odds of seeing so risk premium built into Sterling. Furthermore, political uncertainty surrounding PM Johnson and the lack of trust from his own party opens up another can of worms for Sterling (the currency usually doesn’t perform well when the future of a PM is brought into doubt), and that remains a driver to watch in the sessions ahead. CFTC Analysis Latest CFTC data showed a positioning change of +11548 with a net non-commercial position of -39171. It seems like both price action and positioning has caught up with the BoE’s hike in December with Sterling putting in a decent week of gains and positioning also seeing a sizeable reduction in net-shorts. The Week Ahead In the week ahead it’s quiet on the data front for the UK once again with GDP the only real data point of concern but we are not expecting much from it. Arguably one of the bigger drivers for the GBP will be what happens to overall risk sentiment as well as the USD. As a currency with a slightly higher beta, the Pound can be sensitive to overall risk sentiment so keeping track of how equities markets are doing will be important. Furthermore, even though we maintain a bullish view on Sterling, the recent run higher has been rather one-sided, and we are inching closer towards some very key technical resistance levels around 1.3600. One possible trigger that could see GBPUSD break through that though is Wednesday’s US CPI. After the push lower on Friday, the DXY broke through key support, and a big miss in CPI which means less need for very aggressive Fed policy is not a good look for the USD. JPY FUNDAMENTAL BIAS: BEARISH 1. Monetary Policy At their Dec meeting the BoJ kept policy mostly unchanged apart from unanimously voting to scale back emergency pandemic relief funding from March which includes tapering corporate bond and commercial paper buying, but they did also vote to extend a portion of the pandemic relief loan scheme to March for smaller firms. As always, the BoJ said they are ready to add additional stimulus and easing steps as the economy needs it. The bank reiterated that even though the economy has picked up it does still remain in a severe situation due to the COVID-19. The bank remains dovish and is unlikely going to change anytime soon. 2. 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 for the JPY; and although monetary policy expectations can still prove marketmoving 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 ongoing monetary and fiscal policy support paved the way for markets to expect a robust global economic recovery. As the Fed and other banks start to normalize, we do need to remember that it means those fiscal and monetary policy support is being reduced, which could mean a lot more volatility for markets in the weeks and months ahead. Even though that doesn’t mean our med-term bias for the JPY has changed, it simply means that we should expect more risk sentiment ebbs and flows this year, and the heightened volatility can create some fantastic directional moves in the JPY, as long as yields play their part. 3. Low-yielding currency with inverse correlation to US10Y As a low yielding currency, the JPY usually shares a strong inverse correlation to 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 isn’t perfect and will ebb and flow depending on the type of market environment from both a risk and cycle point of view. With the Fed tilting more aggressive, we think that opens up more room for curve flattening to take place with US02Y likely pushing higher while US10Y underperform. In this environment we do see some mild upside risks for the JPY, but we should not look at the influence from yields in isolation and also weigh it up alongside underlying risk sentiment and price action in the USD of course. 4. CFTC Analysis Latest CFTC data showed a positioning change of -9160 with a net non-commercial position of -62262. Even though the JPY’s med-term outlook remains bearish , the big net-shorts for both large speculators and leveraged funds always increases the odds of more punchy safe haven flows and mean reversion when risk sentiment deteriorates. However, despite risk sentiment taking a hit in the past trading week, the JPY has remained pressured as the move in US yields kept any JPY rallies in check. 5. The Week Ahead In the week ahead the biggest focus for the JPY will be on overall risk sentiment with the big rally in risk sentiment going into the last few trading days of the year with S&P futures managing to squeeze out another all-time high and Nasdaq futures getting very close to doing the same. The big amount of upside has been mostly attributed to equities taking the path of least resistance ( med-term bias remains tilted higher) and moves was probably exacerbated by thinner liquidity and lower volumes. If that momentum can continue at the start of the new year, we can expect to see further downside for the safe haven JPY and will be a key focus for the currency for the week ahead. Apart from that, keeping an eye on US yields will be important as always.

NZD USD - FUNDAMENTAL DRIVERS NZD FUNDAMENTAL BIAS: WEAK BULLISH 1. Monetary Policy The RBNZ underwhelmed some market participants who were looking for a 50bsp hike as the bank only delivered on a 25bsp hike as consensus was expecting. Even though the NZD took a plunge after the meeting, we don’t think markets are really giving NZD the upside it deserves after the Nov RBNZ decision. Not referring to the knee-jerk lower after the 25bsp hike of course as that was fully priced in and always ran the risk of underwhelming the bulls, but the outlook in the MPR justifies more NZD strength. The upgrades to the economic outlook between Aug and Nov was positive, with growth seen lower in 2022 but much higher in 2023, CPI is seen higher throughout 2022 and 2023, the Unemployment rate seen lower throughout the forecast horizon, and of course the big upgrade to the OCR which is now seen at 2.6% by 2024, and the bank has brought forward their expectation of reaching the 2.0% neutral rate with 5 quarters. Of course, incoming data will be important (as always) and any new developments with the new Omicron variant will be watched. But barring any major deterioration in the econ data, the recent sell off in the NZD does seem at odds with the fundamental, policy and economic outlook. 2. Economic and health developments Even though the NZ government has abandoned a covid-zero strategy, a ramp in Omicron cases can of course see further restrictions being announced if things get serious so the virus is worth keeping on the radar. Turning to the economic data, the recent macro data has been much better than both the markets and the RBNZ had expected, but markets have not been too bothered with the incoming data and have not given the NZD the upside it deserves in our opinion. For now, based on the economic and policy outlook the NZD still seems undervalued at current prices, but we need to keep close track of the overall risk sentiment given the associated risks of the new variant. 3. Global Risk Outlook As a high-beta currency, the NZD benefited from the market's 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 reflation and post-recession recovery best. If expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the NZD in the med-term, but recent short-term jitters are a timely reminder that risk sentiment is also a very important short-term driver. 4. CFTC Analysis Latest CFTC data showed a positioning change of -424 with a net non-commercial position of -8845. Positioning changes in the past 3 to 4 weeks have shown that a lot of the previous optimism about the NZD was unwound, especially for leveraged funds. Do we think the NZD should be higher? Yes, we do, but markets have not been having it for the past few weeks. For now, it might be best to wait for incoming economic and virus data to provide us with short-term catalysts before we engage the currency back to the upside. 5. The Week Ahead In the week ahead the calendar for the NZD is very light, which means overall risk sentiment will be a key driver. The fact that the big upside in risk assets running into the end of the year did not really see any meaningful upside in the NZD (despite its fundamental outlook) was quite disappointing, and means sentiment is still muddy for the NZD at this juncture. USD FUNDAMENTAL BIAS: BULLISH 1. Monetary Policy A lot more hawkish than expected is how the Fed’s Dec decision can be summed up. The Fed doubled the pace of tapering to $30 billion per month which will see the QE program conclude by March 2022 as was widely expected. The big change came from the updated Summary of Econ Projections where the median dot plot pencilled in 3 hikes for the Fed next year (up from just shy of 1 hike projected just 3 months ago), confirming money market and Fed Fund Future expectations. Fed Chair Powell explained they hadn’t decided whether to pause between the end of tapering and a first hike but reiterated that rates will likely only rise when the taper has concluded. Another positive shift was Powell’s comments that the balance of goals means it could possibly raise rates before full employment has been met due to high inflation , and also stated that with inflation above target, they cannot wait too long to get to maximum employment with current levels of inflation described as a threat to full employment. The hawkish tilt even went so far that the bank started to discuss the balance sheet but said they didn't make any decisions on when the balance sheet would shrink. Even though the dots projected 3 hikes for 2022, the updated rate hike trajectory only showed 1 additional hike over the forecast horizon, which combined with a lower terminal rate was less hawkish than some had feared. Nonetheless, with this recent meeting the Fed is now the second most hawkish CB after the RBNZ and should be supportive for the USD in the med-term . This past week’s meeting minutes also revealed that the bank has started discussing QT with majority of members thinking it’s appropriate to start QT soon after rate lift off which was a much more hawkish tilt than expected from the Fed. 2. Real Yields With the hawkish tilt from the Fed, it should see breakeven inflation rates fall faster than US10Y as a more aggressive Fed should see med-term growth & inflation expectations fall. Rising real yields should be good for the USD as well and one to keep on the radar, especially after this weeks divergence. 3. Global Risk Outlook What happens to growth and inflation this year will be key for the USD, not only growth and inflation in the US though but also on a global scale. The USD usually does bad in reflationary environments (where growth and inflation accelerates globally), while the USD usually does very well when growth and inflation decelerates globally). So, expectations that we are seeing a slowdown in both of them globally should be a positive input for the USD in the med-term . However, it also means there will be a lot of focus on the incoming data to see how it develops. 4. CFTC Analysis Latest CFTC data showed a positioning change of +2289 with a net non-commercial position of +39078. With large specs net-longs close to 2019 highs and leverage funds USD longs also looking stretched, and with a lot of the Fed hawkishness arguably priced in, the USD has been looking vulnerable to some unwinding, which is what we saw this past week. Even though the Fed remains on a hawkish path (for now) and the USD remains bullish from a fundamental outlook point of view, with positioning where it is right now, any recovery in risk sentiment or bad economic data in the US relative to the rest of the world could continue to add some pressure on the Greenback in the short-term. However, it will take a lot to change the overall fundamental bullish outlook given what markets are expecting from 2022. 5. The Week Ahead In the week ahead all eyes will be on US CPI as the main event. Even though there are expectations for inflation to slow, we are not there yet as participants are expecting yet another strong increase for the YY print with the headline expected to push above 7% and the Core measure expected well above 5%. Are these numbers that will scare the markets or the Fed, arguably not, because what more is there to price in. With markets already pricing in 3 hikes (a high probability of a first one in March) and pricing in higher probabilities of more than 3 hikes alongside QT, this week’s print needs to be something truly exceptional to see even more priced in. Thus, just like with NFP last week, we are anticipating more of a downside risk for the USD given the very high bar set by the markets. With everything that has been priced in for the Fed already, an unexpected beat can open up some decent downside in the USD. Just keep in mind that will be tactical trades as the fundamental outlook remains bullish for the USD.

USD CAD - FUNDAMENTAL DRIVERS USD FUNDAMENTAL BIAS: BULLISH 1. Monetary Policy A lot more hawkish than expected is how the Fed’s Dec decision can be summed up. The Fed doubled the pace of tapering to $30 billion per month which will see the QE program conclude by March 2022 as was widely expected. The big change came from the updated Summary of Econ Projections where the median dot plot pencilled in 3 hikes for the Fed next year (up from just shy of 1 hike projected just 3 months ago), confirming money market and Fed Fund Future expectations. Fed Chair Powell explained they hadn’t decided whether to pause between the end of tapering and a first hike but reiterated that rates will likely only rise when the taper has concluded. Another positive shift was Powell’s comments that the balance of goals means it could possibly raise rates before full employment has been met due to high inflation , and also stated that with inflation above target, they cannot wait too long to get to maximum employment with current levels of inflation described as a threat to full employment. The hawkish tilt even went so far that the bank started to discuss the balance sheet but said they didn't make any decisions on when the balance sheet would shrink. Even though the dots projected 3 hikes for 2022, the updated rate hike trajectory only showed 1 additional hike over the forecast horizon, which combined with a lower terminal rate was less hawkish than some had feared. Nonetheless, with this recent meeting the Fed is now the second most hawkish CB after the RBNZ and should be supportive for the USD in the med-term . This past week’s meeting minutes also revealed that the bank has started discussing QT with majority of members thinking it’s appropriate to start QT soon after rate lift off which was a much more hawkish tilt than expected from the Fed. 2. Real Yields With the hawkish tilt from the Fed, it should see breakeven inflation rates fall faster than US10Y as a more aggressive Fed should see med-term growth & inflation expectations fall. Rising real yields should be good for the USD as well and one to keep on the radar, especially after this weeks divergence. 3. Global Risk Outlook What happens to growth and inflation this year will be key for the USD, not only growth and inflation in the US though but also on a global scale. The USD usually does bad in reflationary environments (where growth and inflation accelerates globally), while the USD usually does very well when growth and inflation decelerates globally). So, expectations that we are seeing a slowdown in both of them globally should be a positive input for the USD in the med-term . However, it also means there will be a lot of focus on the incoming data to see how it develops. 4. CFTC Analysis Latest CFTC data showed a positioning change of +2289 with a net non-commercial position of +39078. With large specs net-longs close to 2019 highs and leverage funds USD longs also looking stretched, and with a lot of the Fed hawkishness arguably priced in, the USD has been looking vulnerable to some unwinding, which is what we saw this past week. Even though the Fed remains on a hawkish path (for now) and the USD remains bullish from a fundamental outlook point of view, with positioning where it is right now, any recovery in risk sentiment or bad economic data in the US relative to the rest of the world could continue to add some pressure on the Greenback in the short-term. However, it will take a lot to change the overall fundamental bullish outlook given what markets are expecting from 2022. 5. The Week Ahead In the week ahead all eyes will be on US CPI as the main event. Even though there are expectations for inflation to slow, we are not there yet as participants are expecting yet another strong increase for the YY print with the headline expected to push above 7% and the Core measure expected well above 5%. Are these numbers that will scare the markets or the Fed, arguably not, because what more is there to price in. With markets already pricing in 3 hikes (a high probability of a first one in March) and pricing in higher probabilities of more than 3 hikes alongside QT, this week’s print needs to be something truly exceptional to see even more priced in. Thus, just like with NFP last week, we are anticipating more of a downside risk for the USD given the very high bar set by the markets. With everything that has been priced in for the Fed already, an unexpected beat can open up some decent downside in the USD. Just keep in mind that will be tactical trades as the fundamental outlook remains bullish for the USD. CAD FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy In Dec the BoC left rates at 0.25% as expected and maintained forward guidance where it expects rates at current levels until the middle quarters of 2022. Even though the bank still thinks inflation will ease from 2H22, they did drop the term "temporary" when referring to price pressures, similar to the Fed’s drop of the word transitory. The bank took a slightly bleaker view on growth, pointing to both the new Omicron variant and flooding in British Columbia as possibly drags on growth and something that could elevate supply chain issues. What disappointed markets a bit was that the bank said none of the recent developments warrants any further adjustments to normalization, which disappointed the bulls looking for a possible hawkish tilt. The bank noted that employment is back to pre-covid levels, and economic momentum in Q4 were solid, but the overall tone wasn’t enough to convince markets of a 1Q22 hike, with market odds at roughly 50/50 for the Jan meeting. The recent Omicron restrictions is expected to hit growth in the first quarter, which means a hike in quarter 2 is more likely as the bank would arguably not be in too much of a hurry to turn overly aggressive given the divergence between the divergent government response to Omicron between the US and the BoC. Thus, we think the bank holds off with hikes until 2Q22, which means some of those aggressive policy bets (markets pricing in very close to 5 hikes for this year this past week) will arguably need to be pushed back and repriced. 2. Intermarket Analysis Considerations Oil’s massive post-covid recovery has been impressive, driven by three drivers: supply & demand (OPEC’s production cuts); improving global economic outlook and improving oil demand outlook, even though slightly pushed back by Delta concerns; higher for longer than expected inflation. Even though Oil has recovered a lot of its recent downside and have proven our caution wrong, we are still cautious going into the first two quarters. The drivers keeping us cautious on oil right now is expectations of a more hawkish Fed, slowing growth and inflation, and a possible supply surplus in 1Q22. If our concerns do materialize into downside for oil prices it should put pressure on the CAD. Recent supply constraints in Kazakhstan and Libya has aided oil this past week (alongside some higher inflation inputs), and if that continues it could provide continued short-term support for Oil though so worth keeping that in mind. 3. Global Risk Outlook As a high-beta currency, the CAD benefited from the market's 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 reflation and post-recession recovery best. 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 recent short-term jitters are a timely reminder that risk sentiment is also a very important short-term driver. 4. CFTC Analysis Latest CFTC data showed a positioning change of -691 with a net non-commercial position of -11025. A lot of the previous froth priced into the CAD has arguably been reduced. However, given our concerns about Oil as well as the bar for an aggressive policy response from the BoC looking less certain, we do think there is chance of some additional repricing for the CAD going into 2022, which is why we’ve shifted our fundamental outlook to neutral from weak bullish. 5. The Week Ahead In the week ahead the calendar is very slim for the CAD with no tier 1 data points. The good jobs print on Friday provided some additional upside for the CAD, which had a decent start to the new year. However, as employment is often seen as a lagging indicator, as well as the newly announced covid restrictions in Canada, we do think the growth and employment situation in 1Q22 is facing some deterioration. For now, the markets have seemed comfortable with that and the CAD has been very resilient, but we are not sure how long that can continue.

AUD JPY - FUNDAMENTAL DRIVERS AUD FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy In Dec the RBA kept rates at 0.10% and weekly bond purchases at A$4bln until mid-Feb, as expected. They reiterated that they are committed to maintaining highly supportive monetary conditions and won’t raise rates until actual inflation is sustainably within their 2%-3% target range. They noted that the economy is recovering from the Delta slowdown and is expected to return to pre-Delta path in 1H22. The positive take from the meeting was that the RBA does not think Omicron will derail the recovery and sounded a bit more optimistic than markets anticipated. They also said they will consider the future of their QE program at the Feb meeting and outlined their criteria which include actions of other central banks, bond market functioning and actual and expected progress towards the goals of full employment and inflation consistent with their target. All in all, the bank still had a dovish stance but was more optimistic about the economy than expected. Furthermore, out of the 3 criteria set by the bank, the first two is arguably a green light, so now we wait for incoming economic data to see whether it’s good enough for the bank to stop QE . 2. Economic & Health Developments There are 4 key drivers we’re watching for Australia’s med-term outlook: The virus situation – so far, the RBA has been positive about a post-Delta recovery, but incoming employment and inflation data will be crucial to see whether that optimism is justified. China – Even though the PBoC has finally stepped up with new stimulus & some fiscal support is expected in 1H22, the Covid-Zero policy in China does risk that the expected 2022 recovery might be delayed (not derailed) so the recent rapid rise in cases is one to watch in case China sees additional lockdown restrictions. Politically, the recent AUKUS defence pact could see possible retaliation from China against Australian goods. Commodities – Iron Ore, (24% of exports) and Coal prices (18% of exports) are important for terms of trade, and with both of them pushing higher on PBoC easing, that is a positive for the AUD as long as they remain their recent push higher. Global growth – as a risk proxy, where the global economy goes from here will be another important consideration for AUD, with more focus on China though. 3. Global Risk Outlook As a high-beta currency, the AUD benefited from the market's improving risk outlook coming out of the pandemic as participants moved out of safe-havens. As a pro-cyclical currency, the AUD enjoyed upside alongside other cyclical assets supported by reflation and post-recession recovery best. If expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the AUD in the med-term , but recent short-term jitters are a timely reminder that risk sentiment is also a very important short-term driver. 4. CFTC Analysis Latest CFTC data showed positioning change of -7526 with a net non-commercial position of -89366. As outsized net-shorts are usually seen as a contrarian indicator we want to be mindful of potential squeezes higher for the AUD, which also means that the AUD is likely to be more sensitive to positive data than negative data. The downside in equities have seen an additional increase in net-shorts and has once again moved closer towards historical lows, so be weary of short squeezes in the event of positive news. 5. The Week Ahead The week ahead is light in terms of economic data for the Aussie Dollar with only Retail Sales on the schedule. Even though it’s not a tier 1 data point, a substantial surprise could be market-moving for the AUD in the event of an unexpected beat which might see some of the stretched net-shorts square up and could create some upside in the AUD. Apart from that, the idea of a faster Fed as well as the steep rise in global yields have put equities under pressure, and as a favourite risk proxy has hit the AUD quite hard, so any further downside in equities will be important for the AUD this week and could see further pressure added if it also coincides with additional lockdown fears in China. On the China front we also have Chinese inflation data coming out this week so keep that on the radar for potential reactions in the AUD as well. JPY FUNDAMENTAL BIAS: BEARISH 1. Monetary Policy At their Dec meeting the BoJ kept policy mostly unchanged apart from unanimously voting to scale back emergency pandemic relief funding from March which includes tapering corporate bond and commercial paper buying, but they did also vote to extend a portion of the pandemic relief loan scheme to March for smaller firms. As always, the BoJ said they are ready to add additional stimulus and easing steps as the economy needs it. The bank reiterated that even though the economy has picked up it does still remain in a severe situation due to the COVID-19. The bank remains dovish and is unlikely going to change anytime soon. 2. 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 for the JPY; and although monetary policy expectations can still prove marketmoving 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 ongoing monetary and fiscal policy support paved the way for markets to expect a robust global economic recovery. As the Fed and other banks start to normalize, we do need to remember that it means those fiscal and monetary policy support is being reduced, which could mean a lot more volatility for markets in the weeks and months ahead. Even though that doesn’t mean our med-term bias for the JPY has changed, it simply means that we should expect more risk sentiment ebbs and flows this year, and the heightened volatility can create some fantastic directional moves in the JPY, as long as yields play their part. 3. Low-yielding currency with inverse correlation to US10Y As a low yielding currency, the JPY usually shares a strong inverse correlation to 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 isn’t perfect and will ebb and flow depending on the type of market environment from both a risk and cycle point of view. With the Fed tilting more aggressive, we think that opens up more room for curve flattening to take place with US02Y likely pushing higher while US10Y underperform. In this environment we do see some mild upside risks for the JPY, but we should not look at the influence from yields in isolation and also weigh it up alongside underlying risk sentiment and price action in the USD of course. 4. CFTC Analysis Latest CFTC data showed a positioning change of -9160 with a net non-commercial position of -62262. Even though the JPY’s med-term outlook remains bearish , the big net-shorts for both large speculators and leveraged funds always increases the odds of more punchy safe haven flows and mean reversion when risk sentiment deteriorates. However, despite risk sentiment taking a hit in the past trading week, the JPY has remained pressured as the move in US yields kept any JPY rallies in check. 5. The Week Ahead In the week ahead the biggest focus for the JPY will be on overall risk sentiment with the big rally in risk sentiment going into the last few trading days of the year with S&P futures managing to squeeze out another all-time high and Nasdaq futures getting very close to doing the same. The big amount of upside has been mostly attributed to equities taking the path of least resistance ( med-term bias remains tilted higher) and moves was probably exacerbated by thinner liquidity and lower volumes. If that momentum can continue at the start of the new year, we can expect to see further downside for the safe haven JPY and will be a key focus for the currency for the week ahead. Apart from that, keeping an eye on US yields will be important as always.

AUD USD - FUNDAMENTAL DRIVERS AUD FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy In Dec the RBA kept rates at 0.10% and weekly bond purchases at A$4bln until mid-Feb, as expected. They reiterated that they are committed to maintaining highly supportive monetary conditions and won’t raise rates until actual inflation is sustainably within their 2%-3% target range. They noted that the economy is recovering from the Delta slowdown and is expected to return to pre-Delta path in 1H22. The positive take from the meeting was that the RBA does not think Omicron will derail the recovery and sounded a bit more optimistic than markets anticipated. They also said they will consider the future of their QE program at the Feb meeting and outlined their criteria which include actions of other central banks, bond market functioning and actual and expected progress towards the goals of full employment and inflation consistent with their target. All in all, the bank still had a dovish stance but was more optimistic about the economy than expected. Furthermore, out of the 3 criteria set by the bank, the first two is arguably a green light, so now we wait for incoming economic data to see whether it’s good enough for the bank to stop QE. 2. Economic & Health Developments There are 4 key drivers we’re watching for Australia’s med-term outlook: The virus situation – so far, the RBA has been positive about a post-Delta recovery, but incoming employment and inflation data will be crucial to see whether that optimism is justified. China – Even though the PBoC has finally stepped up with new stimulus & some fiscal support is expected in 1H22, the Covid-Zero policy in China does risk that the expected 2022 recovery might be delayed (not derailed) so the recent rapid rise in cases is one to watch in case China sees additional lockdown restrictions. Politically, the recent AUKUS defence pact could see possible retaliation from China against Australian goods. Commodities – Iron Ore, (24% of exports) and Coal prices (18% of exports) are important for terms of trade, and with both of them pushing higher on PBoC easing, that is a positive for the AUD as long as they remain their recent push higher. Global growth – as a risk proxy, where the global economy goes from here will be another important consideration for AUD, with more focus on China though. 3. Global Risk Outlook As a high-beta currency, the AUD benefited from the market's improving risk outlook coming out of the pandemic as participants moved out of safe-havens. As a pro-cyclical currency, the AUD enjoyed upside alongside other cyclical assets supported by reflation and post-recession recovery best. If expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the AUD in the med-term, but recent short-term jitters are a timely reminder that risk sentiment is also a very important short-term driver. 4. CFTC Analysis Latest CFTC data showed positioning change of -7526 with a net non-commercial position of -89366. As outsized net-shorts are usually seen as a contrarian indicator we want to be mindful of potential squeezes higher for the AUD, which also means that the AUD is likely to be more sensitive to positive data than negative data. The downside in equities have seen an additional increase in net-shorts and has once again moved closer towards historical lows, so be weary of short squeezes in the event of positive news. 5. The Week Ahead The week ahead is light in terms of economic data for the Aussie Dollar with only Retail Sales on the schedule. Even though it’s not a tier 1 data point, a substantial surprise could be market-moving for the AUD in the event of an unexpected beat which might see some of the stretched net-shorts square up and could create some upside in the AUD. Apart from that, the idea of a faster Fed as well as the steep rise in global yields have put equities under pressure, and as a favourite risk proxy has hit the AUD quite hard, so any further downside in equities will be important for the AUD this week and could see further pressure added if it also coincides with additional lockdown fears in China. On the China front we also have Chinese inflation data coming out this week so keep that on the radar for potential reactions in the AUD as well. USD FUNDAMENTAL BIAS: BULLISH 1. Monetary Policy A lot more hawkish than expected is how the Fed’s Dec decision can be summed up. The Fed doubled the pace of tapering to $30 billion per month which will see the QE program conclude by March 2022 as was widely expected. The big change came from the updated Summary of Econ Projections where the median dot plot pencilled in 3 hikes for the Fed next year (up from just shy of 1 hike projected just 3 months ago), confirming money market and Fed Fund Future expectations. Fed Chair Powell explained they hadn’t decided whether to pause between the end of tapering and a first hike but reiterated that rates will likely only rise when the taper has concluded. Another positive shift was Powell’s comments that the balance of goals means it could possibly raise rates before full employment has been met due to high inflation, and also stated that with inflation above target, they cannot wait too long to get to maximum employment with current levels of inflation described as a threat to full employment. The hawkish tilt even went so far that the bank started to discuss the balance sheet but said they didn't make any decisions on when the balance sheet would shrink. Even though the dots projected 3 hikes for 2022, the updated rate hike trajectory only showed 1 additional hike over the forecast horizon, which combined with a lower terminal rate was less hawkish than some had feared. Nonetheless, with this recent meeting the Fed is now the second most hawkish CB after the RBNZ and should be supportive for the USD in the med-term. This past week’s meeting minutes also revealed that the bank has started discussing QT with majority of members thinking it’s appropriate to start QT soon after rate lift off which was a much more hawkish tilt than expected from the Fed. 2. Real Yields With the hawkish tilt from the Fed, it should see breakeven inflation rates fall faster than US10Y as a more aggressive Fed should see med-term growth & inflation expectations fall. Rising real yields should be good for the USD as well and one to keep on the radar, especially after this weeks divergence. 3. Global Risk Outlook What happens to growth and inflation this year will be key for the USD, not only growth and inflation in the US though but also on a global scale. The USD usually does bad in reflationary environments (where growth and inflation accelerates globally), while the USD usually does very well when growth and inflation decelerates globally). So, expectations that we are seeing a slowdown in both of them globally should be a positive input for the USD in the med-term. However, it also means there will be a lot of focus on the incoming data to see how it develops. 4. CFTC Analysis Latest CFTC data showed a positioning change of +2289 with a net non-commercial position of +39078. With large specs net-longs close to 2019 highs and leverage funds USD longs also looking stretched, and with a lot of the Fed hawkishness arguably priced in, the USD has been looking vulnerable to some unwinding, which is what we saw this past week. Even though the Fed remains on a hawkish path (for now) and the USD remains bullish from a fundamental outlook point of view, with positioning where it is right now, any recovery in risk sentiment or bad economic data in the US relative to the rest of the world could continue to add some pressure on the Greenback in the short-term. However, it will take a lot to change the overall fundamental bullish outlook given what markets are expecting from 2022. 5. The Week Ahead In the week ahead all eyes will be on US CPI as the main event. Even though there are expectations for inflation to slow, we are not there yet as participants are expecting yet another strong increase for the YY print with the headline expected to push above 7% and the Core measure expected well above 5%. Are these numbers that will scare the markets or the Fed, arguably not, because what more is there to price in. With markets already pricing in 3 hikes (a high probability of a first one in March) and pricing in higher probabilities of more than 3 hikes alongside QT, this week’s print needs to be something truly exceptional to see even more priced in. Thus, just like with NFP last week, we are anticipating more of a downside risk for the USD given the very high bar set by the markets. With everything that has been priced in for the Fed already, an unexpected beat can open up some decent downside in the USD. Just keep in mind that will be tactical trades as the fundamental outlook remains bullish for the USD.

AUD JPY - FUNDAMENTAL DRIVERS AUD FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy In Dec the RBA kept rates at 0.10% and weekly bond purchases at A$4bln until mid-Feb, as expected. They reiterated that they are committed to maintaining highly supportive monetary conditions and won’t raise rates until actual inflation is sustainably within their 2%-3% target range. They noted that the economy is recovering from the Delta slowdown and is expected to return to pre-Delta path in 1H22. The positive take away from the meeting was that the Omicron variant is not expected to derail the recovery. The bank said they’ll consider the future of their QE program at the Feb meeting. Furthermore, the bank also outlined their criteria for deciding on the future of bond purchases, which include actions of other central banks, bond market functioning and actual and expected progress towards the goals of full employment and inflation consistent with the target. All in all, the bank still had a dovish stance but was more optimistic about the economy than expected. 2. Economic & Health Developments There are 4 key drivers we are watching for Australia’s med-term outlook: The virus situation – so far, the RBA is positive about the post-Delta recovery, so incoming data will be crucial to see whether that optimism is justified. China – After months of waiting, the PBoC finally stepped up with easing & news of fiscal stimulus coming in early 2022 is a very important positive development for the AUD. Politically, the recent AUKUS defence pact could see retaliation from China against Australian goods. Commodities – Iron Ore, (24% of exports) and Coal prices (18% of exports) are important for terms of trade, and with both of them pushing higher on the PBoC easing, that is a positive for the AUD. Global growth – as a risk proxy, where the global economy goes from here will be another important consideration for AUD, with more focus on China though. 3. Global Risk Outlook As a high-beta currency, the AUD benefited from the market's improving risk outlook coming out of the pandemic as participants moved out of safe-havens. As a pro-cyclical currency, the AUD enjoyed upside alongside other cyclical assets supported by reflation and post-recession recovery best. If expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the AUD in the med-term, but recent short-term jitters are a timely reminder that risk sentiment is also a very important short-term driver. 4. CFTC Analysis Latest CFTC data showed a positioning change of +2889 with a net non-commercial position of - 78903. As outsized net-shorts are usually seen as a contrarian indicator we want to be mindful of potential squeezes, which means the AUD is likely to be more sensitive to positive data than negative data. The recent positives from China and key Australian commodities already saw some shorts being squeezed out last week, and as long as Omicron doesn’t cause a global meltdown the prospects is starting to look better for the AUD going into 2022. 5. The Week Ahead In the week ahead it’s going to be a bit of a snoozer out there with no major events, at least ones that the markets will really care about. That means overall risk sentiment will be a key driver for markets. On that front, Omicron developments will be on the radar as cases continue to rise and more countries are moving towards stricter lockdowns. The Fed’s hawkish tilt and what that means for the med-term growth and inflation outlook will also be interesting. Also keep in mind that this week will be very quiet with reduced participation as many desks closed last week, so liquidity will be thin, and volumes will be low which means lacklustre market but could also mean exacerbated volatility if we get important news crossing the wires. We do have the RBA minutes being released on Tuesday which will be interesting given the slightly more optimistic tone from the bank at their recent policy meeting surrounding the Australian economy despite the Omicron risks. JPY FUNDAMENTAL BIAS: BEARISH 1. Monetary Policy At their Dec meeting the BoJ kept policy mostly unchanged apart from unanimously voting to scale back emergency pandemic relief funding from March which includes tapering corporate bond and commercial paper buying, but they did also vote to extend a portion of the pandemic relief loan scheme to March for smaller firms. As always, the BoJ said they are ready to add additional stimulus and easing steps as the economy needs it. The bank reiterated that even though the economy has picked up it does still remain in a severe situation due to the COVID-19. The bank remains dovish and is unlikely going to change anytime soon. 2. 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. 3. 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. With the Fed tilting more aggressive, we think that opens up more room for curve flattening to take place with US02Y likely pushing higher while US10Y underperform. In this environment we do see some mild upside risks for the JPY, but we should not look at the influence from yields in isolation and also weigh it up alongside underlying risk sentiment and the USD of course. 4. CFTC Analysis Latest CFTC data showed a positioning change of +9558 with a net non-commercial position of - 53523. Even though the JPY’s med-term outlook remains bearish, the big net-shorts for both large speculators and leveraged funds always increases the odds of mean reversion when risk sentiment deteriorates. However, the size of the recent unwind has been substantial and leaves room for some downside if risk assets can see some recovery. 5. The Week Ahead In the week ahead it’s going to be a bit of a snoozer out there with no major events, at least ones that the markets will really care about. That means overall risk sentiment will be a key driver for markets. On that front, Omicron developments will be on the radar as cases continue to rise and more countries are moving towards stricter lockdowns. The Fed’s hawkish tilt and what that means for the med-term growth and inflation outlook will also be interesting. Also keep in mind that this week will be very quiet with reduced participation as many desks closed last week, so liquidity will be thin, and volumes will be low which means lacklustre market but could also mean exacerbated volatility if we get important news crossing the wires. It’s also important to keep the JPY’s net-short positioning in mind, which means any major risk off flows is likely going to see the JPY a favourite safe haven as opposed to the CHF or USD (also keeping yields in mind of course).

Today’s Notable Sentiment Shifts USD – The dollar rose on Wednesday after the Federal Reserve said it would end its pandemic-era bond purchases in March next year, paving the way for a new cycle of policy tightening and rate normalization. Reuters summarized the Fed’s announcement, stating that “officials at the median projected the US central bank’s benchmark overnight interest rate would need to rise from its current near-zero level to 0.90% by the end of 2022. That would kick off a hiking cycle that would see the Fed’s policy rate climb to 1.6% in 2023 and 2.1% in 2024 – nearing but never exceeding levels it would consider restrictive of economic activity.”

AUD JPY - FUNDAMENTAL DRIVERS AUD FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy In Dec the RBA kept rates at 0.10% and weekly bond purchases at A$4bln until mid-Feb, as expected. They reiterated that they are committed to maintaining highly supportive monetary conditions and won’t raise rates until actual inflation is sustainably within their 2%-3% target range. They noted that the economy is recovering from the Delta slowdown and is expected to return to pre-Delta path in 1H22. The positive take away from the meeting was that the Omicron variant is not expected to derail the recovery. The bank said they’ll consider the future of their QE program at the Feb meeting. Furthermore, the bank also outlined their criteria for deciding on the future of bond purchases, which include actions of other central banks, bond market functioning and actual and expected progress towards the goals of full employment and inflation consistent with the target. All in all, the bank still had a dovish stance but was more optimistic about the economy than expected. 2. Economic & Health Developments There are 4 key drivers we are watching for Australia’s med-term outlook: The virus situation – so far, the RBA is positive about the post-Delta recovery, so incoming data will be crucial to see whether that optimism is justified. China – After months of waiting, the PBoC finally stepped up with easing & news of fiscal stimulus coming in early 2022 is a very important positive development for the AUD. Politically, the recent AUKUS defence pact could see retaliation from China against Australian goods. Commodities – Iron Ore, (24% of exports) and Coal prices (18% of exports) are important for terms of trade, and with both of them pushing higher on the PBoC easing, that is a positive for the AUD. Global growth – as a risk proxy, where the global economy goes from here will be another important consideration for AUD, with more focus on China though. 3. Global Risk Outlook As a high-beta currency, the AUD benefited from the market's improving risk outlook coming out of the pandemic as participants moved out of safe-havens. As a pro-cyclical currency, the AUD enjoyed upside alongside other cyclical assets supported by reflation and post-recession recovery best. If expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the AUD in the med-term, but recent short-term jitters are a timely reminder that risk sentiment is also a very important short-term driver. 4. CFTC Analysis Latest CFTC data showed a positioning change of -1607 with a net non-commercial position of - 81792. As outsized net-shorts are usually seen as a contrarian indicator we want to be mindful of potential squeezes, which means the AUD is likely to be more sensitive to positive data than negative data. The recent positives from China already saw shorts being squeezed last week, and as long as Omicron doesn’t cause a global meltdown the prospects is looking better for the AUD into 2022. 5. The Week Ahead In the week ahead the main drivers for global markets will of course be the huge amount of central bank meetings, so risk sentiment will be important for the AUD on the back of that. Specifically for Australia, the markets will of course be watching the virus front with any outbreaks of the Omicron variant could see markets expect more restrictions for Australia. On the data front there will be a lot of focus on the employment report as it’s a key consideration for the RBA, not only for rates but also regarding the QE. Expectations are for a print of 200k, and an Unemployment Rate drop to 5.0% from 5.2%. As always there will be more focus on the full-time component. Even though one employment print isn’t going to immediately change the RBA’s mind, a very solid print would probably be enough to see a further unwind in those stretched shorts and could provide a decent short-term lift for the AUD this week. JPY FUNDAMENTAL BIAS: BEARISH 1. Monetary Policy At their Oct meeting the BoJ left policy settings unchanged with rates kept at -0.10% and the JGB yield target kept close to 0%. As usual we saw BoJ’s Kataoka as the only dissenter on YCC. In terms of the economic projections, the bank lowered both their growth and inflation targets as was previously reported prior to the meeting. The bank lowered FY2021 GDP to 3.4% from the prior 3.8%, and lower FY2021 Core CPI to 0.0% from the previous 0.6%. The bank’s outlook report once again explained that Japan’s consumer inflation is likely to gradually grind higher and noted that exports and output are currently weak due to the ongoing supply constraints. However, as with their prior meeting the bank explained that both exports and output is increasing as a trend. At the press conference, Governor Kuroda said that a soft JPY raises costs for households and imports but that he does not think current JPY weakness is a bad thing. He further added that it is desirable for FX to move in a stable manner, reflecting fundamentals and that he thinks the JPY’s current price action reflects the fundamentals. The Governor also added that YCC could lead to a weak JPY as it widens interest rate differentials. 2. 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. 3. 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. With the Fed tilting more aggressive, we think that opens up more room for curve flattening to take place with US02Y likely pushing higher while US10Y underperform. In this environment we do see some mild upside risks for the JPY, but we should not look at the influence from yields in isolation and also weigh it up alongside underlying risk sentiment. 4. CFTC Analysis Latest CFTC data showed a positioning change of +15785 with a net non-commercial position of - 63081. The risk off tones during the past two weeks and the subsequent gains in the JPY showed why stretched positioning is such an important consideration. Even though the JPY’s med-term outlook remains bearish, the big net-shorts for both large speculators and leveraged funds always increases the odds of mean reversion when risk sentiment deteriorates. However, the size of the recent unwind has been substantial and leaves room for some downside if risk assets can continue their recovery that started last week. 5. The Week Ahead In the week ahead the main drivers for global markets will of course be the huge amount of central bank meetings, so risk sentiment will be important for the JPY on the back of that. We also have the BoJ coming up later in the week, but as usual markets are not expecting the bank to create any meaningful volatility for the JPY. With Omicron on the radar, the bank has yet another excuse to just keep the gravy train running as they’ve done for the past three decades which means the bigger influence for the JPY in the week ahead will be risk sentiment and of course US yields.

NZD CHF - FUNDAMENTAL DRIVERS NZD FUNDAMENTAL BIAS: WEAK BULLISH 1. Monetary Policy The RBNZ underwhelmed some market participants who were looking for a 50bsp hike as the bank only delivered on a 25bsp hike as consensus was expecting. Even though the NZD took a plunge after the meeting, we don’t think markets are really giving NZD the upside it deserves after the Nov RBNZ decision. Not referring to the knee-jerk lower after the 25bsp hike of course as that was fully priced in and always ran the risk of underwhelming the bulls, but the outlook in the MPR justifies more NZD strength. The upgrades to the economic outlook between Aug and Nov was positive, with growth seen lower in 2022 but much higher in 2023, CPI is seen higher throughout 2022 and 2023, the Unemployment rate seen lower throughout the forecast horizon, and of course the big upgrade tothe OCR which is now seen at 2.6% by 2024, and the bank has brought forward their expectation of reaching the 2.0% neutral rate with 5 quarters. Of course, incoming data will be important (as always) and any new developments with the new Omicron variant will be watched but barring any major deterioration in the economic data the recent sell off in the NZD does seem at odds with the fundamental, policy and economic outlook. 2. Economic and health developments Just as the domestic borders are opening up in New Zealand, the Omicron concerns across the globe are ramping up with governments like the UK lifting the alert level to 4 over the weekend. Even though the government has abandoned a draconian covid-zero strategy, a ramp in Omicron cases can of course see further restrictions being announced. The recent macro data has been much better than both the markets and the RBNZ had expected, but markets have not been too bothered with the incoming data and have not given the NZD the upside it deserves in our opinion. For now, based on the economic and policy outlook the NZD seems undervalued at current prices, but we need to keep close track of the overall risk sentiment given the associated risks of the new variant. 3. Global Risk Outlook As a high-beta currency, the NZD benefited from the market's 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 reflation and post-recession recovery best. If expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the NZD in the med-term, but recent short-term jitters are a timely reminder that risk sentiment is also a very important short-term driver. 4. CFTC Analysis Latest CFTC data showed a positioning change of +78 with a net non-commercial position of +10708. Positioning is not stretched compared to historical net-long levels, but as the second largest netlong for large speculators and the biggest for leveraged funds there is always scope for unwinding if we see strong bouts of risk off sentiment like we had over the past two weeks. However, it’s very encouraging to see that leveraged funds have once again increased their net-longs despite the recent underperformance from the NZD which could mean that we are not the only ones that sees value in buying the NZD from current ‘undervalued’ levels. 5. The Week Ahead In the week ahead the main drivers for global markets will of course be the huge amount of central bank meetings, so risk sentiment will be important for the NZD on the back of that. Apart from central bank meetings, we do have Governor Orr’s testimony coming up on Tuesday, which will be one to keep on the radar with the new variant in mind. Furthermore, we have quarterly GDP coming up on Wed as well, which will be interesting for the NZD. Recall that most of the recent macro data has been surprising meaningfully to the upside, but the Q3 print is expected to see a decent contraction close to -4.5% due to the Q3 covid lockdowns. Thus, markets are likely to discount a bigger miss as covid-related but could add more importance if we see a much smaller contraction and could be supportive for the NZD. CHF FUNDAMENTAL BIAS: BEARISH 1. Monetary Policy At its most recent meeting, all policies remained unchanged with the policy rate kept at -0.75% and the bank keeping the CHF classification as ‘highly valued’. The bank reiterated an all too familiar willingness to intervene in the FX market in order to counter upward pressure on the CHF. The bankreassured markets that recent upside in the CHF has not gone unnoticed. The bank also noted that the new conditional inflation forecast for 2021 and 2022 is slightly higher than in June but said that this is due to current supply chain challenges and stressed that their longer-term view of inflation is ‘virtually unchanged compared with June’. The bank also explained that the vulnerability of the mortgage and real estate markets have risen, and that they are keeping a close eye on Mortgage lending and residential property prices, but also stated that they regularly assess the possible needs for reactivating the countercyclical buffers. All in all, this meeting provided nothing new for markets and as such was not enough to change our fundamental dovish outlook. 2. Global Risk Outlook As a safe-haven currency, the market's risk outlook is usually the primary driver for the CHF with economic data and SNB policy meetings rarely market moving. 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 dovish disposition and preference for being behind the ECB in terms of policy decisions. The market's overall risk tone remains constructive in the med-term due to the global vaccine roll out and the massive amount of monetary policy and fiscal support from governments. The Delta variant and its impact on growth expectations is of course a sobering reminder that risks remain, especially with new variants like Omicron. 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. But on balance the overall risk outlook is positive in the med-term. 3. Idiosyncratic Drivers Despite the fundamental bearish bias, the CHF continues to remain surprisingly strong and is a friendly reminder that the CHF often has a mind of its own. Even though SNB intervention is a downside risk to keep in mind, the bank has been surprisingly sanguine with EURCHF breaking below 1.04. Some research argues that recent CHF strength could be due to the lower inflation in Switzerland compared to the EU, UK and US, which has meant more demand for Swiss goods and has meant less need for capital flight. Thus, inflation differentials as well as trade data out of Switzerland could serve as proxies for where the currency goes in the med-term. 4. CFTC Analysis Latest CFTC data showed a positioning change of +2129 with a net non-commercial position of - 12053. With positioning close to neutral for large specs and leveraged funds, the overall driver in the short-term remains underlying risk sentiment, and of course possible SNB intervention. 5. The Week Ahead In the week ahead the main drivers for global markets will of course be the huge amount of central bank meetings, so risk sentiment will be important for the NZD on the back of that. We do also have the SNB coming up later in the week, where the biggest focus will be on what the bank has to say about the CHF’s recent strength, especially versus the EUR. Even though sight deposits have increased after the previous meeting, they are nowhere near the levels compared to previous occasions when the EURCHF was trading sub-1.05. Any commitments to intervene will probably be ignored by markets unless it is backed up with a visible increase in the sight deposits.

Today’s Notable Sentiment Shifts USD – The dollar rose across the board on Monday ahead of this week’s highly anticipated FOMC meeting. Investor expectations are quickly growing around the odds of the central bank announcing it will wrap up its bond purchases sooner than expected while also looking for clues on the timing of interest rate hikes next year. Indeed, Wester Union notes that “the market has priced in the Fed concluding its bond tapering in Q1 and expects the central bank to put a rate hike firmly on the table by early summer.”

EUR NZD - FUNDAMENTAL DRIVERS EUR FUNDAMENTAL BIAS: BEARISH 1. Monetary Policy In Oct the ECB didn’t offer new info on policy or forward guidance. Inflation was the biggest talking point among the GC. The bank acknowledged price pressures will be higher and last longer than previously anticipated. But also reiterated that CPI will move back below their 2% target in the medterm (2023). The meeting was seen as a placeholder meeting for Dec, where they’re expected to announce the way forward for the PEPP and API, with markets expecting a formal end to the PEPP program from March 2022 but looking for info on how and what type of transition to expect for the bond purchase plans. After the meeting, the EUR saw upside initially attributed to the bank not pushing back enough against market forecasts for a hike next year but as we noted the move looked more in line with short covering and month-end USD selling. For now, the bias for policy remains dovish and a negative driver for the EUR. 2. Economic & Health Developments Earlier issues with vaccinations and lockdowns at the start of 2021 weighed on EU growth prospects, with growth differentials against the US and UK still quite wide, despite some of the recent strong economic data. Even though the recent activity data suggests the hit to the economy from previous lockdowns weren’t as bad as feared, the massive climb in case numbers across Europe, and now cases of the new Omicron variant also identified, odds for further lockdowns are increasing. Any further escalation with more member states moving into strict lockdowns will further weigh on growth prospects and the EUR, and as a result (and combined with ongoing central bank policy divergence) the fundamental outlook remains bearish for the EUR. On the fiscal front, attention is still on ongoing discussions among EU states to potentially allow the purchase of green bonds NOT to count against budget deficits. Such a decision could drastically change the fiscal picture and we would expect it to be a big positive for the EUR and EU equities if that change should come to pass. 3. Funding Characteristics The EUR’s funding characteristics are also in focus. As a low yielder (like JPY & CHF), the EUR has been a funding choice among carry trades, especially during 2019 where it was a favourite against high yielding EM’. Also, part of the EUR upside in the initial risk-off scare in March 2020 was attributed to an unwind of large carry trades. Recently the EUR has exhibited some resilience during risk off tones. As more central banks start normalizing policy, the EUR’s use as a funder could add additional pressure in the med-term. But it could also spark risk off upside if some of those trades unwind. This doesn’t make the EUR a safe haven, but as rates climb globally it can become more sensitive to carry. 4. CFTC Analysis Latest CFTC data showed a positioning change of -6788 with a net non-commercial position of 23240. Even though positioning isn’t stretched on the large speculator side, it’s a different story for leveraged funds which is sitting on the biggest net-short for the majors. That means watching key technical levels to the upside for possible squeezes. 5. The Week Ahead It’s a quiet week on the data side for the Eurozone. The main focus for market participants will be on risk sentiment and of course the USD. The consensus short position that was built up in EURUSD over the past few weeks saw short covering push the EUR higher across the board, likely also driven by some funding trades unwinding as well. Thus, this week the focus will be on whether further risk sentiment continues to pressure the Dollar and favour the EUR or whether the usual status quo pushes the pair lower in risk off environments. NZD FUNDAMENTAL BIAS: WEAK BULLISH 1. Monetary Policy The RBNZ underwhelmed some market participants who were looking for a 50bsp hike as the bank only delivered on a 25bsp hike as consensus was expecting. Even though the NZD took a plunge after the meeting, we don’t think markets are really giving NZD the upside it deserves after the Nov RBNZ decision. Not referring to the knee-jerk lower after the 25bsp hike of course as that was fully priced in and always ran the risk of underwhelming the bulls, but the outlook in the MPR justifies more NZD strength. The upgrades to the economic outlook between Aug and Nov was positive, with growth seen lower in 2022 but much higher in 2023, CPI is seen higher throughout 2022 and 2023, the Unemployment rate seen lower throughout the forecast horizon, and of course the big upgrade to the OCR which is now seen at 2.6% by 2024, and the bank has brought forward their expectation of reaching the 2.0% neutral rate with 5 quarters. Of course, incoming data will be important (as always) and any new developments with the new Omicron variant will be watched but barring any major deterioration in the economic data the recent sell off in the NZD does seem at odds with the fundamental, policy and economic outlook. 2. Economic and health developments We heard some good news two weeks with PM Ardern announcing that the whole country will be lifting lockdown restrictions from Nov 29th and that their domestic borders will open up from the middle of Dec, which was a positive move for businesses going into the festive season. The recent macro data has been much better than both the markets and the RBNZ had expected, but markets have not been too bothered with the incoming data. That might start to change as focus turns to the new variant and its potential impact on the global economy. For now, based on the economic and policy outlook the NZD seems undervalued at current prices. 3. Global Risk Outlook As a high-beta currency, the NZD benefited from the market's 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 reflation and post-recession recovery best. If expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the NZD in the med-term , but recent short-term jitters are a timely reminder that risk sentiment is also a very important short-term driver. 4. CFTC Analysis Latest CFTC data showed a positioning change of -3309 with a net non-commercial position of +10630. Positioning is not stretched compared to historical net-long levels, but as the second largest net-long for large speculators and the biggest for leveraged funds there is always scope for unwinding if we see strong bouts of risk off sentiment like we had over the past two weeks. However, it’s very encouraging to see that leveraged funds have increased their net-long despite the recent underperformance from the NZD. 5. The Week Ahead With the RBNZ out of the way until February, the main focus for the NZD in the med-term will be key quarterly economic data points going into the Fed meeting (none of them are expected this week), and of course overall risk sentiment will be in focus in the short-term. The recent Omicron and Fed-inspired risk off has hit the NZD really hard. Given the economic and policy outlook we still see scope to upside in the NZD, but timing will be very important given the amount of uncertainty sparked by Omicron and the Fed. Barring any major Omicron updates it’ll be worth keeping a close eye on cross-asset implied volatility for signals of when some calm might be restored.

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