NZD CAD - FUNDAMENTAL DRIVERS
NZD
FUNDAMENTAL BIAS: BULLISH
1. Monetary Policy
At their April meeting the RBNZ surprise economists but not STIR markets by delivering a 50bsp hike, taking the OCR to 1.50%. The bank stressed, like most others, that inflation is a concern and that they will ensure that higher price pressures don’t become embedded in longer-term inflation expectations. The NZD initially pushed higher after the 50bsp hike (surprising economists) but it faded initial strength to trade much lower (as a 50bsp was almost fully priced by STIR markets). The statement reflected the hawkish tone we’ve grown accustomed to see from the bank over the past few months with the Committee saying they agreed that their policy ‘path of least regrets’ was to increase the OCR by 50bsp now rather than later, and of course stated that more hikes
are needed (in line with their OCR projections). The one less hawkish element for the decision was that the bank didn’t increase their neutral rate expectations and instead said they are comfortable with their February MPS OCR outlook. The markets wanted to see a clear promise of more 50bsp hikes or alternatively wanted to see an increase of the neutral rate expectations, and without either of those the 50bsp hike was simply seen as front-loading. As a result of this, money markets were pricing in just a 25bsp for May for the majority of Wednesday. But after calls from Westpac, ASB and Kiwibank for a 50bsp in May we saw the NZD regain some
composure on Thursday as STIR markets priced in a 60% chance of a 50bsp hike. The RBNZ remain hawkish, but a lot of that is arguably priced in and might not continue to offer much more support for the NZD.
2. Economic outlook
The econ outlook looks solid as growth & inflation is expected to accelerate, home prices up 30%, commodity prices supported, and a ratified trade deal with China (opening more Chinese markets for NZ goods). Given it’s trade with China and Australia the recent Covid situation in China is a short-term negative for the NZD.
3. Global Risk Outlook
As a high-beta currency, the NZD 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 NZD.
4. CFTC Analysis
Most recent positioning data for the NZD was mostly a mixed bag with no major bullish or bearish signals to take from it with positioning remaining close to neutral across participant categories. With a lot of one-sided upside in recent weeks some mean reversion makes sense, especially with the current Covid situation getting worse in China, and the correlation to equities last week showing some traditional risk sensitivity for the NZD.
5. The Week Ahead
For the week ahead it’s a very light econ calendar for the NZD with no major events to keep on the radar. That means short-term concerns regarding China might be the bigger driver for the NZD as well as the AUD in the week ahead. For China, the covid situation will be in focus, as well as any potential stimulus promises as well as the incoming Caixin PMI on Friday.
CAD
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
The BoC delivered on expectations with a 50bsp hike as well as announcing a start to passive QT from the end of April by ending its reinvestment of maturing bonds. The bank upgraded both inflation and growth estimates as markets were expecting but did play a hawkish card by also increasing their neutral rate estimate to 2.5% from 2.25%. They acknowledged the growing risks from the current geopolitical situation but made it very clear that they are concerned about inflation and their hike of 50bsp showed that they think that policy needs to be normalized quickly (which some took as a hint that another 50bsp is on the way). The bank didn’t offer any additional clarity on QT but did note that they are not considering active QT of selling bonds just yet. Some conditionality also surfaced, where they explained that any sudden negative shocks to growth or inflation could see them pause hikes once they get closer towards neutral ( Gov Macklem also added that they might need to get rates slightly above neutral in the current cycle). Overall, it was a more hawkish than expected BoC decision, but interesting to note that STIR markets did not price in another 50bsp following the meeting (only a 25bsp) hike. We remain of the opinion that we are close to peak hawkishness for the BoC and are looking for the last push higher in the CAD for opportunities to sell.
2. Intermarket Analysis Considerations
Oil’s impressive post-covid recovery has been driven by many factors such as supply & demand , global demand recovery, and more recently geopolitical concerns. At current prices the risk to demand destruction and stagflation is high, which means we remain cautious of oil in the med-term . Reason for caution: Synchronised policy tightening targeting demand, slowing growth, consensus longs, steep backwardation curve, heightened implied volatility . We remain cautious oil , but geopolitics are a key driver and focus for Petro-currencies like the CAD (even though the CAD-Oil correlation has been hit and miss).
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
Aggregate positioning was bullish yet again, but not as bullish as the prior week. We also started to see a first possibly sign that price action could have reached a bit of a top after recent BoC news have been priced in. We think markets are setting up a similar path compared to April 2021, Oct 2021 and Jan 2022 where markets were too aggressive to price in CAD upside only to see majority of it unwind later. For now, timing is very important, and we’re waiting for deeper pullbacks in AUDCAD & USDCAD for long opportunities.
5. The Week Ahead
It’s a very light econ calendar for Canada this week, which means risk sentiment and WTI will be interesting drivers to watch. The correlation between WTI and CAD has been mostly hit and miss over the past couple of weeks, but that doesn’t mean we should ignore Oil’s potential impact on CAD price action. Thus, the energy market will be in focus as usual where any oil-positive developments could support the CAD while any oilnegative news could pressure the CAD. As for risk sentiment, it’s interesting that the only high-beta major that held up okay last week despite risk off tones was the CAD. We’re not sure what to make of that right now, but know that if market sentiment deteriorates enough, that the CAD will not be able to stay immune to that.
FUNDAMENTAL BIAS: BULLISH
1. Monetary Policy
At their April meeting the RBNZ surprise economists but not STIR markets by delivering a 50bsp hike, taking the OCR to 1.50%. The bank stressed, like most others, that inflation is a concern and that they will ensure that higher price pressures don’t become embedded in longer-term inflation expectations. The NZD initially pushed higher after the 50bsp hike (surprising economists) but it faded initial strength to trade much lower (as a 50bsp was almost fully priced by STIR markets). The statement reflected the hawkish tone we’ve grown accustomed to see from the bank over the past few months with the Committee saying they agreed that their policy ‘path of least regrets’ was to increase the OCR by 50bsp now rather than later, and of course stated that more hikes
are needed (in line with their OCR projections). The one less hawkish element for the decision was that the bank didn’t increase their neutral rate expectations and instead said they are comfortable with their February MPS OCR outlook. The markets wanted to see a clear promise of more 50bsp hikes or alternatively wanted to see an increase of the neutral rate expectations, and without either of those the 50bsp hike was simply seen as front-loading. As a result of this, money markets were pricing in just a 25bsp for May for the majority of Wednesday. But after calls from Westpac, ASB and Kiwibank for a 50bsp in May we saw the NZD regain some
composure on Thursday as STIR markets priced in a 60% chance of a 50bsp hike. The RBNZ remain hawkish, but a lot of that is arguably priced in and might not continue to offer much more support for the NZD.
2. Economic outlook
The econ outlook looks solid as growth & inflation is expected to accelerate, home prices up 30%, commodity prices supported, and a ratified trade deal with China (opening more Chinese markets for NZ goods). Given it’s trade with China and Australia the recent Covid situation in China is a short-term negative for the NZD.
3. Global Risk Outlook
As a high-beta currency, the NZD 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 NZD.
4. CFTC Analysis
Most recent positioning data for the NZD was mostly a mixed bag with no major bullish or bearish signals to take from it with positioning remaining close to neutral across participant categories. With a lot of one-sided upside in recent weeks some mean reversion makes sense, especially with the current Covid situation getting worse in China, and the correlation to equities last week showing some traditional risk sensitivity for the NZD.
5. The Week Ahead
For the week ahead it’s a very light econ calendar for the NZD with no major events to keep on the radar. That means short-term concerns regarding China might be the bigger driver for the NZD as well as the AUD in the week ahead. For China, the covid situation will be in focus, as well as any potential stimulus promises as well as the incoming Caixin PMI on Friday.
CAD
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
The BoC delivered on expectations with a 50bsp hike as well as announcing a start to passive QT from the end of April by ending its reinvestment of maturing bonds. The bank upgraded both inflation and growth estimates as markets were expecting but did play a hawkish card by also increasing their neutral rate estimate to 2.5% from 2.25%. They acknowledged the growing risks from the current geopolitical situation but made it very clear that they are concerned about inflation and their hike of 50bsp showed that they think that policy needs to be normalized quickly (which some took as a hint that another 50bsp is on the way). The bank didn’t offer any additional clarity on QT but did note that they are not considering active QT of selling bonds just yet. Some conditionality also surfaced, where they explained that any sudden negative shocks to growth or inflation could see them pause hikes once they get closer towards neutral ( Gov Macklem also added that they might need to get rates slightly above neutral in the current cycle). Overall, it was a more hawkish than expected BoC decision, but interesting to note that STIR markets did not price in another 50bsp following the meeting (only a 25bsp) hike. We remain of the opinion that we are close to peak hawkishness for the BoC and are looking for the last push higher in the CAD for opportunities to sell.
2. Intermarket Analysis Considerations
Oil’s impressive post-covid recovery has been driven by many factors such as supply & demand , global demand recovery, and more recently geopolitical concerns. At current prices the risk to demand destruction and stagflation is high, which means we remain cautious of oil in the med-term . Reason for caution: Synchronised policy tightening targeting demand, slowing growth, consensus longs, steep backwardation curve, heightened implied volatility . We remain cautious oil , but geopolitics are a key driver and focus for Petro-currencies like the CAD (even though the CAD-Oil correlation has been hit and miss).
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
Aggregate positioning was bullish yet again, but not as bullish as the prior week. We also started to see a first possibly sign that price action could have reached a bit of a top after recent BoC news have been priced in. We think markets are setting up a similar path compared to April 2021, Oct 2021 and Jan 2022 where markets were too aggressive to price in CAD upside only to see majority of it unwind later. For now, timing is very important, and we’re waiting for deeper pullbacks in AUDCAD & USDCAD for long opportunities.
5. The Week Ahead
It’s a very light econ calendar for Canada this week, which means risk sentiment and WTI will be interesting drivers to watch. The correlation between WTI and CAD has been mostly hit and miss over the past couple of weeks, but that doesn’t mean we should ignore Oil’s potential impact on CAD price action. Thus, the energy market will be in focus as usual where any oil-positive developments could support the CAD while any oilnegative news could pressure the CAD. As for risk sentiment, it’s interesting that the only high-beta major that held up okay last week despite risk off tones was the CAD. We’re not sure what to make of that right now, but know that if market sentiment deteriorates enough, that the CAD will not be able to stay immune to that.
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