CAD CHF - FUNDAMENTAL DRIVERS
CAD
FUNDAMENTAL OUTLOOK: NEUTRAL
BASELINE
The CAD has enjoyed far more upside in the past few weeks than we anticipated. We’ve been cautious on the currency given Canada’s dependency on the US (>70% of exports) where the clear signs of a faster than expected slowdown and possible recession should deteriorate the growth outlook for Canada. Apart from that, the risks to the Canadian housing market can negatively impact consumer spending as interest rates rise higher at aggressive speed. Potentially damaging the wealth effect created by the rapid rise in house prices since covid. However, despite the risks to the economy and the outlook, markets still price in a strangely favourable growth environment for Canada, also supported by a big push higher in terms of trade due to the rise in commodity prices. Furthermore, despite clear warning signals, the BoC has chosen to ignore the negatives and has stayed very hawkish, hiking 1.0% in July. The market’s reaction after the 1.0% was quite telling though, with the CAD pushing lower afterwards. This suggests that those players that were long could’ve used the hike as a spot to take profit, or it could be the market pricing in a possible pause for the BoC in the months ahead because hiking so aggressive now means reaching a level to pause their cycle much faster. Either way, we remain cautious on the CAD and favour short-term catalysts that provide us with shorting opportunities.
POSSIBLE BULLISH SURPRISES
As an oil exporter, oil prices are important for CAD. Catalysts that see further upside in Oil (deteriorating supply outlook, ease in demand fears) could trigger bullish CAD reactions. The correlation has been hit and miss in recent weeks though. As a risk sensitive currency, and catalyst that causes big bouts of risk on sentiment could trigger bullish reactions in the CAD. Even though lots of tightening has been priced for the BoC, any overly hawkish comments from the BoC or big upside surprises in econ data could trigger short-term upside, but with a 100bsp providing no upside, risks are titled to the downside.
POSSIBLE BEARISH SURPRISES
As an oil exporter, oil prices are important for CAD. Any catalyst that triggers meaningful downside in oil (deteriorating demand outlook, ease in supply shortage, less supply constraints) could be a negative catalyst for the CAD as well. As a risk sensitive currency, and catalyst that causes big bouts of risk off sentiment could trigger bearish reactions in the CAD. With a lot of tightening priced into STIRs, and a 100bsp hike providing no support for the CAD, we think risks are skewed lower, and any big downside surprises in econ data could offer decent shorting opportunities for the CAD.
BIGGER PICTURE
The bigger picture outlook for the CAD remains neutral for now. Given the clear risks to the growth outlook due to the slowdown in the US, as well as rising risks to the consumer and the housing market, and potential negative impact for commodities like oil, we remain cautious on the currency (even though it’s moved much higher than we anticipated from the start of the year). With a lot of good news priced in, our preferred way of trading the CAD is lower on clear short-term negative catalysts.
CHF
FUNDAMENTAL OUTLOOK: WEAK BULLISH
BASELINE
The CHF has been supported in recent months as STIR markets have steadily priced in higher interest rates for Switzerland, as well the SNB’s reluctance to intervene in the currency markets to try and weaken the CHF. At their June meeting, the SNB took a very aggressive policy step by hiking rates with 50bsp and removing their previous classification that the CHF is ‘highly valued’. Unlike other central banks, the SNB has chosen to try and tackle inflation before it runs rampant by hiking rates aggressively. Their hike in June was the first hike since 2007, and if the bank follows through with a hike in September it will mean Switzerland will have positive interest rates for the first time in almost a decade. There is scope for further CHF upside in the months ahead with 4 supporting drivers. SNB’s hawkish tilt, the bank’s acceptance of a stronger CHF with less intervention, negative underlying risk sentiment driven by the global cyclical slowdown, rising inflation . The SNB did note that they are willing to be active in the foreign exchange market to ensure appropriate monetary conditions which means too much CHF strength could get the wrong attention from the bank.
POSSIBLE BULLISH SURPRISES
Any incoming data (especially CPI on Thursday) or SNB comments that causes markets to price in even more aggressive policy from the bank could trigger bullish reactions in the CHF. As a risk sensitive currency, and catalyst that causes big bouts of risk off sentiment could trigger bullish reactions in the CHF. The more aggressive markets think the ECB will be with incoming hikes, the more aggressive they will be for the SNB. Thus, data that trigger hawkish ECB expectations could also be supportive for the CHF.
POSSIBLE BEARISH SURPRISES
The SNB has not been as active in trying to devalue the CHF through sight deposits as they have been in recent years. With the bank now on a hiking cycle, any drastic appreciation could spark some intervention and would be a bearish catalyst. As a risk sensitive currency, and catalyst that causes big bouts of risk on sentiment could trigger bearish reactions in the CHF. Further lower repricing of ECB hikes could trigger downside in the CHF as well, and the biggest dovish risk for the currency is a big surprise miss on any incoming CPI data.
BIGGER PICTURE
The SNB surprised with a 50bsp hike and signalled, that unlike other central banks, they will not get behind the curve. Apart from a hawkish central bank , we also have the economy on a steady footing, as well as less risk of intervention as SNB’s Jordan said they no longer see the CHF as highly valued (there is of course risk that they could intervene if the CHF appreciates too much too fast). This means the bias for the CHF is bullish and we’re looking for dips as CHF for buying opportunities.
FUNDAMENTAL OUTLOOK: NEUTRAL
BASELINE
The CAD has enjoyed far more upside in the past few weeks than we anticipated. We’ve been cautious on the currency given Canada’s dependency on the US (>70% of exports) where the clear signs of a faster than expected slowdown and possible recession should deteriorate the growth outlook for Canada. Apart from that, the risks to the Canadian housing market can negatively impact consumer spending as interest rates rise higher at aggressive speed. Potentially damaging the wealth effect created by the rapid rise in house prices since covid. However, despite the risks to the economy and the outlook, markets still price in a strangely favourable growth environment for Canada, also supported by a big push higher in terms of trade due to the rise in commodity prices. Furthermore, despite clear warning signals, the BoC has chosen to ignore the negatives and has stayed very hawkish, hiking 1.0% in July. The market’s reaction after the 1.0% was quite telling though, with the CAD pushing lower afterwards. This suggests that those players that were long could’ve used the hike as a spot to take profit, or it could be the market pricing in a possible pause for the BoC in the months ahead because hiking so aggressive now means reaching a level to pause their cycle much faster. Either way, we remain cautious on the CAD and favour short-term catalysts that provide us with shorting opportunities.
POSSIBLE BULLISH SURPRISES
As an oil exporter, oil prices are important for CAD. Catalysts that see further upside in Oil (deteriorating supply outlook, ease in demand fears) could trigger bullish CAD reactions. The correlation has been hit and miss in recent weeks though. As a risk sensitive currency, and catalyst that causes big bouts of risk on sentiment could trigger bullish reactions in the CAD. Even though lots of tightening has been priced for the BoC, any overly hawkish comments from the BoC or big upside surprises in econ data could trigger short-term upside, but with a 100bsp providing no upside, risks are titled to the downside.
POSSIBLE BEARISH SURPRISES
As an oil exporter, oil prices are important for CAD. Any catalyst that triggers meaningful downside in oil (deteriorating demand outlook, ease in supply shortage, less supply constraints) could be a negative catalyst for the CAD as well. As a risk sensitive currency, and catalyst that causes big bouts of risk off sentiment could trigger bearish reactions in the CAD. With a lot of tightening priced into STIRs, and a 100bsp hike providing no support for the CAD, we think risks are skewed lower, and any big downside surprises in econ data could offer decent shorting opportunities for the CAD.
BIGGER PICTURE
The bigger picture outlook for the CAD remains neutral for now. Given the clear risks to the growth outlook due to the slowdown in the US, as well as rising risks to the consumer and the housing market, and potential negative impact for commodities like oil, we remain cautious on the currency (even though it’s moved much higher than we anticipated from the start of the year). With a lot of good news priced in, our preferred way of trading the CAD is lower on clear short-term negative catalysts.
CHF
FUNDAMENTAL OUTLOOK: WEAK BULLISH
BASELINE
The CHF has been supported in recent months as STIR markets have steadily priced in higher interest rates for Switzerland, as well the SNB’s reluctance to intervene in the currency markets to try and weaken the CHF. At their June meeting, the SNB took a very aggressive policy step by hiking rates with 50bsp and removing their previous classification that the CHF is ‘highly valued’. Unlike other central banks, the SNB has chosen to try and tackle inflation before it runs rampant by hiking rates aggressively. Their hike in June was the first hike since 2007, and if the bank follows through with a hike in September it will mean Switzerland will have positive interest rates for the first time in almost a decade. There is scope for further CHF upside in the months ahead with 4 supporting drivers. SNB’s hawkish tilt, the bank’s acceptance of a stronger CHF with less intervention, negative underlying risk sentiment driven by the global cyclical slowdown, rising inflation . The SNB did note that they are willing to be active in the foreign exchange market to ensure appropriate monetary conditions which means too much CHF strength could get the wrong attention from the bank.
POSSIBLE BULLISH SURPRISES
Any incoming data (especially CPI on Thursday) or SNB comments that causes markets to price in even more aggressive policy from the bank could trigger bullish reactions in the CHF. As a risk sensitive currency, and catalyst that causes big bouts of risk off sentiment could trigger bullish reactions in the CHF. The more aggressive markets think the ECB will be with incoming hikes, the more aggressive they will be for the SNB. Thus, data that trigger hawkish ECB expectations could also be supportive for the CHF.
POSSIBLE BEARISH SURPRISES
The SNB has not been as active in trying to devalue the CHF through sight deposits as they have been in recent years. With the bank now on a hiking cycle, any drastic appreciation could spark some intervention and would be a bearish catalyst. As a risk sensitive currency, and catalyst that causes big bouts of risk on sentiment could trigger bearish reactions in the CHF. Further lower repricing of ECB hikes could trigger downside in the CHF as well, and the biggest dovish risk for the currency is a big surprise miss on any incoming CPI data.
BIGGER PICTURE
The SNB surprised with a 50bsp hike and signalled, that unlike other central banks, they will not get behind the curve. Apart from a hawkish central bank , we also have the economy on a steady footing, as well as less risk of intervention as SNB’s Jordan said they no longer see the CHF as highly valued (there is of course risk that they could intervene if the CHF appreciates too much too fast). This means the bias for the CHF is bullish and we’re looking for dips as CHF for buying opportunities.
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