CAD CHF – FUNDAMENTAL DRIVERS for FOREXCOM: CADCHF By Thunderpips
1. The BdCprospects for the
At their September meeting, the BdC in line with market expectations by not providing any new information. The bank acknowledged that the recent blow to growth was bigger than expected, but also explained that it deems the blow to be temporary and still expects solid growth this year. They also reaffirmed that although is currently high and expected to increase, they consider current price pressures to be mostly transient. The meeting did not change market expectations that the bank will move forward to announce another round of C $ 1 billion cuts at its October meeting, especially after the recent report on the Emploi painted a portrait of a growing and recovering labor market, albeit at a slightly slower pace compared to June and July.
2. Currency linked to commodities with dependency Oil exports
Oil staged a massive recovery after hitting rock bottom in 2020. The higher movement in recent months was driven by (OPEC production cuts); improving global economic prospects and improving oil the demand outlook, even slightly pushed back by Delta’s concerns (vaccines and stimulus induced by monetary and fiscal stimulus); rising expectations. Even if additional earnings for Oil will undoubtedly prove to be an uphill battle from here, the bias remains positive in the middle term as long as the supporting factors and current drivers remain intact. We will of course have short term ebbs and flows as we have seen in recent weeks that could affect the CAD from a cross-market perspective, but as long as the middle term see for Oil remains higher which should be favorable to petro-currencies like the CAD.
3. Changing global risk outlook.
As a high beta currency, the CAD has benefited from improving the risk outlook for the market in recent months, as participants moved away from safe-haven assets to riskier, higher-yielding assets. As a pro-cyclical currency, the CAD benefited from a rise alongside other cyclical assets at the start of what the majority of market participants believe to be an early post-recession phase of recovery. While expectations for the global economy remain positive, the overall positive outlook for risk sentiment should be favorable to the CAD in the middle term , but the recent short-term nervousness and risk exit flows have once again shown us why risk sentiment is also a very important short-term driver for the currency.
4. CFTC analysis
The latest CFTC data (updated through September 14) showed a change in positioning of -3273 with a net non-trade position of -9283. After some substantial unwinding of the oversubscribed net-long positioning over the past two months, we have now seen the CAD positioning move into netshort territory, and since the middle term the bias is always this means that there is still room to run upward in accordance with the set fundamentals. Even though market expectations for the October tapering are intact, markets have been reluctant to trade the CAD in line with its fundamental bias. The USDCAD As an example, we have of course seen some significant swings over the past couple of months, but despite them the pair remains largely unchanged from where we were trading two months ago. It may take some patience with this one until we get more clarity from the incoming US data as well as the expected cutting actions from the Fed.
1. Developments surrounding the global risk outlook.
As a safe haven currency, the risk outlook of the market is the primary driver of the CHF. Swiss economic data rarely proves that the market is changing; and although the SNB’s intervention could have a substantial impact impact on CHF, its impact tends to be relatively short-lived. Moreover, the SNB is unlikely to adjust its policy anytime soon, given their tone and a preference to be behind the ECB in terms of political decisions. The overall risk level of the market has improved significantly from just a year ago due to the global deployment of vaccines and the unprecedented amount of accommodation and government tax support. The Delta variant and following impact on growth expectations is of course a sobering reminder that risks remain. Thus, there is always a degree of uncertainty and risks to the overall risk outlook that could prove favorable to safe havens like the CHF if negative factors for the global economy were to develop. Overall, however, the overall risk outlook continues to improve and, barring a major collapse in risk assets, the bias for the CHF remains in the middle term .
2. Idiosyncratic drivers for CHF
Despite the negative factors, the CHF has remained surprisingly strong over the past two weeks. This divergence from the fundamental outlook doesn’t make much sense, but the CHF often has a mind of its own and can often move in opposite directions to what short-term sentiment or its fundamental outlook suggests. Recent research by the team has revealed an interesting correlation between simultaneous price movements of the CHF in Gold and the USD, which may explain part of the recent price movement. We should also be careful of the possibility of SNB FX intervention. Except that, ING investment bank recently argued that the recent strength of the CHF could be due to the decline in Switzerland against the EU, which means that the real trade-weighted franc has traded too low. They also explained that the purchase of bonds by the ECB meant that their is growing faster than that of the SNB, which could explain why the SNB has not seen the need for significant foreign exchange intervention lately. In the end, there are often many idiosyncratic factors that may or may not impact the CHF and makes short-term price fluctuations a mixed bag for the most part.
3. CFTC analysis
The latest CFTC data (updated through September 14) showed a change in positioning of -6098 with a net non-trade position of -5878. Positioning in the CHF has continued to unwind some of its recent surprising strength in recent weeks. The CHF has now returned to net short territory as one would expect from a currency with a middle term perspectives. Although we expect the currency to continue to weaken in the middle term , any drastic escalation in risk tones could continue to support the safe haven currency in the short term.