CAD CHF - FUNDAMENTAL DRIVERS
CAD
FUNDAMENTAL BIAS: BULLISH
1. The Monetary Policy outlook for the BoC
At their Oct meeting the bank surprised markets by decided to put an early end to their QE purchases and also updated their forward guidance to suggest and earlier lift off in rates by explaining that they now see economic slack being absorbed by die middle quarters of 2022. The initial reaction was very bullish as one would expect and saw the CAD appreciate across the board. We think the biggest risk to further upside for the CAD from here is the fact that a lot of these positives that was confirmed by the BoC has already been reflected in both the CAD and rates markets over the past few weeks. The CAD has seen a similar run to the upside back in 1Q21 with the BoC’s hawkish tilt, and similarly to that we feel current prices for rates and the CAD already reflect a great deal of the positives. Thus, even though the med-term outlook remains tilted to the upside for the CAD, there is the risk of seeing some unwind of the recent upside and is something to be mindful of when making any med-term allocations to the upside in the CAD.
2. Commodity-linked currency with dependency on Oil exports
Oil staged a massive recovery after hitting rock bottom in 2020 and the move higher over recent months has been driven by supply & demand (OPEC’s production cuts); improving global economic outlook and improving oil demand outlook, even though slightly pushed back by Delta concerns; rising inflation expectations. Even though further gains for Oil will arguably prove to be an uphill battle, the bias remains higher in the med-term as long as current supportive factors and drivers remains intact. There will of course be short-term ebbs and flows which could affect the CAD from an intermarket point of view, but as long as the med-term view for Oil remains higher it should be supportive for Petro-currencies like the CAD. The recent energy crisis affecting large parts of the globe has placed upside pressure in Oil , Gas and Coal and has support the CAD. A possible risk for Oil prices (and by connection the CAD) is any attempts by the US or OPEC+ to calm down prices. On the US side they could opt to release more of their reserves and on OPEC’s side they could announce additional increases in production output. This week we have another OPEC+ meeting so keeping that on the radar for the CAD will be important in the week ahead.
3. Developments surrounding the 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 +14244 with a net non-commercial position of +3320. With a lot of positives in the price for the CAD and the front-end yields, it is however encouraging to see that positioning isn’t stretched for either large specs or leveraged funds, and suggest that further upside could of course be possible if short-term sentiment for oil and risk assets remain favourable.
CHF
FUNDAMENTAL BIAS: BEARISH
1. Developments surrounding the global risk outlook.
As a safe-haven currency, the market's risk outlook is the primary driver for the CHF with Swiss economic data or SNB policy meetings rarely being very 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 improved considerably after the pandemic as a result of the global vaccine roll out and the unprecedented amount of monetary policy accommodation and fiscal support from governments. The Delta variant and subsequent impact on growth expectations is of course a sobering reminder that risks remain. Thus, there is still a degree of uncertainty and risks to the overall risk outlook remains which could prove supportive for the safe havens like the CHF should negative factors for the global economy develop. However, on balance the overall risk outlook is still positive in the med-term and barring any major meltdowns in risk assets the bias for the CHF remains bearish in the med-term.
2. Idiosyncratic drivers for the CHF
Despite the negative drivers, the CHF saw some surprisingly strength from June. This divergence from the fundamental outlook didn’t make much sense, but the CHF often has a mind of its own and can often move in opposite directions from what short-term sentiment or its fundamental outlook suggests. Recent research from the team has revealed an interesting correlation between the CHF and simultaneous price action in both Gold and the USD which could explain some of the recent price action. We also need to be careful of the possibility of SNB FX intervention. Apart from that, ING investment bank has recently argued that recent CHF strength could be due to the lower inflation in Switzerland compared to the EU which meant that the real trade-weighted CHF has been trading too cheap. They also expanded that the ECB’s bond buying has meant that their balance sheet is expanding more rapidly compared to that of the SNB, which could have been reasons why the SNB did not see the need for any meaningful FX intervention lately. The bottom line is that there are often plenty of idiosyncratic drivers which might or might not impact the CHF and makes short-term price fluctuations a mixed bag for the most part.
3. CFTC Analysis
Latest CFTC data showed a positioning change of -1795 with a net non-commercial position of -19379. Positioning has decreased for the CHF with the latest CFTC data, but it’s worth noting that the majority of the CHF’s upside in the recent week took place after Tuesday so will mostly likely only show up in the data for this coming Friday. Even though we expect the currency to continue weakening in the med-term, any drastic escalation in risk off tones could continue to provide support for the safe-haven currency in the short-term and is always something to keep in mind. With the EURCHF pair treading water around the 1.06, UBS believes the pair already entered SNB intervention territory back at 1.07 and looks to fade any further downside in the pair as opportunities to lean into longs. If you choose to trade the CHF, be ready for some unexpected price action from time to time (see driver 2 above).
FUNDAMENTAL BIAS: BULLISH
1. The Monetary Policy outlook for the BoC
At their Oct meeting the bank surprised markets by decided to put an early end to their QE purchases and also updated their forward guidance to suggest and earlier lift off in rates by explaining that they now see economic slack being absorbed by die middle quarters of 2022. The initial reaction was very bullish as one would expect and saw the CAD appreciate across the board. We think the biggest risk to further upside for the CAD from here is the fact that a lot of these positives that was confirmed by the BoC has already been reflected in both the CAD and rates markets over the past few weeks. The CAD has seen a similar run to the upside back in 1Q21 with the BoC’s hawkish tilt, and similarly to that we feel current prices for rates and the CAD already reflect a great deal of the positives. Thus, even though the med-term outlook remains tilted to the upside for the CAD, there is the risk of seeing some unwind of the recent upside and is something to be mindful of when making any med-term allocations to the upside in the CAD.
2. Commodity-linked currency with dependency on Oil exports
Oil staged a massive recovery after hitting rock bottom in 2020 and the move higher over recent months has been driven by supply & demand (OPEC’s production cuts); improving global economic outlook and improving oil demand outlook, even though slightly pushed back by Delta concerns; rising inflation expectations. Even though further gains for Oil will arguably prove to be an uphill battle, the bias remains higher in the med-term as long as current supportive factors and drivers remains intact. There will of course be short-term ebbs and flows which could affect the CAD from an intermarket point of view, but as long as the med-term view for Oil remains higher it should be supportive for Petro-currencies like the CAD. The recent energy crisis affecting large parts of the globe has placed upside pressure in Oil , Gas and Coal and has support the CAD. A possible risk for Oil prices (and by connection the CAD) is any attempts by the US or OPEC+ to calm down prices. On the US side they could opt to release more of their reserves and on OPEC’s side they could announce additional increases in production output. This week we have another OPEC+ meeting so keeping that on the radar for the CAD will be important in the week ahead.
3. Developments surrounding the 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 +14244 with a net non-commercial position of +3320. With a lot of positives in the price for the CAD and the front-end yields, it is however encouraging to see that positioning isn’t stretched for either large specs or leveraged funds, and suggest that further upside could of course be possible if short-term sentiment for oil and risk assets remain favourable.
CHF
FUNDAMENTAL BIAS: BEARISH
1. Developments surrounding the global risk outlook.
As a safe-haven currency, the market's risk outlook is the primary driver for the CHF with Swiss economic data or SNB policy meetings rarely being very 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 improved considerably after the pandemic as a result of the global vaccine roll out and the unprecedented amount of monetary policy accommodation and fiscal support from governments. The Delta variant and subsequent impact on growth expectations is of course a sobering reminder that risks remain. Thus, there is still a degree of uncertainty and risks to the overall risk outlook remains which could prove supportive for the safe havens like the CHF should negative factors for the global economy develop. However, on balance the overall risk outlook is still positive in the med-term and barring any major meltdowns in risk assets the bias for the CHF remains bearish in the med-term.
2. Idiosyncratic drivers for the CHF
Despite the negative drivers, the CHF saw some surprisingly strength from June. This divergence from the fundamental outlook didn’t make much sense, but the CHF often has a mind of its own and can often move in opposite directions from what short-term sentiment or its fundamental outlook suggests. Recent research from the team has revealed an interesting correlation between the CHF and simultaneous price action in both Gold and the USD which could explain some of the recent price action. We also need to be careful of the possibility of SNB FX intervention. Apart from that, ING investment bank has recently argued that recent CHF strength could be due to the lower inflation in Switzerland compared to the EU which meant that the real trade-weighted CHF has been trading too cheap. They also expanded that the ECB’s bond buying has meant that their balance sheet is expanding more rapidly compared to that of the SNB, which could have been reasons why the SNB did not see the need for any meaningful FX intervention lately. The bottom line is that there are often plenty of idiosyncratic drivers which might or might not impact the CHF and makes short-term price fluctuations a mixed bag for the most part.
3. CFTC Analysis
Latest CFTC data showed a positioning change of -1795 with a net non-commercial position of -19379. Positioning has decreased for the CHF with the latest CFTC data, but it’s worth noting that the majority of the CHF’s upside in the recent week took place after Tuesday so will mostly likely only show up in the data for this coming Friday. Even though we expect the currency to continue weakening in the med-term, any drastic escalation in risk off tones could continue to provide support for the safe-haven currency in the short-term and is always something to keep in mind. With the EURCHF pair treading water around the 1.06, UBS believes the pair already entered SNB intervention territory back at 1.07 and looks to fade any further downside in the pair as opportunities to lean into longs. If you choose to trade the CHF, be ready for some unexpected price action from time to time (see driver 2 above).
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