Head of FX Strategy, Saxo Bank Group
Summary: The US dollar is teetering on the brink, but has not yet been sent packing after the recent dovish shift from Powell. The market may be pressing its case on the latter as hard as it can for now. Elsewhere, the CAD rally looks remarkably aggressive ahead of tomorrow’s Bank of Canada meeting.
The risk rebound continued yesterday, though the extension higher was rather muted compared to Friday’s rally, and we wonder if the move has already largely played out as we have risen as much as 10% from the lows in the case of the S&P 500 index. Again, we point to the difficulty in sustaining a rally in sentiment merely on the Fed backing down, as renewed strong risk appetite and solid or better US data can only mean that the Fed will revert to its former hike path. And if the economy and financial conditions worsen, further shifts in the Fed’s stance are only in recognition of the bad news. I suspect this dynamic will drive the risk of a very choppy, back and forth market next quarter or more.
The rally in CAD has outpaced that of every other currency since yesterday after a stronger than expected Ivey PMI. The late CAD strength is in sympathy with the relief rally in risk appetite and oil prices. This looks more than anything like a short squeeze ahead of tomorrow’s Bank of Canada meeting. Have traders forgotten the jarring dovish shift in the BoC’s policy guidance at the December 5 meeting?
My suspicion is that we are seeing a CAD short squeeze that may reverse quickly in the coming days. Further muddying the outlook for the Canadian economy, on top of energy market and housing bubble unwind risks, the Justin Trudeau’s government has just introduced a novel new carbon tax that may weigh on growth. Trudeau is likely in the final months of his time as Canada’s prime minister, as he looks vulnerable to the country's version of national populism at the election later this year.
Chart: USDCAD
USDCAD potentially pivotal over the next couple of days after a brutal correction to the churning rally higher. The price action has taken us all the way back near the level of the last Bank of Canada meeting on December 5, in which it effectively abandoned its forward guidance anticipating further rate hikes. This latest bounce in risk sentiment and oil prices look far from sufficient to drive any shift back to a more hopeful outlook from Poloz and company tomorrow. Short dated USDCAD call options one way to trade a CAD retrenchment. Any remaining bulls here will want support to come in quickly after we have traded below the old 1.3385 highs.
The market is trying to get back to the pre-Covid and pre-war times, but that model is broken. A new dawn is here and the financial world needs to adapt.
Steen Jakobsen,
Chief Investment Officer
A political switch in China towards less tough control of its people and companies may kick things back into gear.
Redmond Wong,
Market Strategist
While the economic situation in Europe may not be as bad as feared, there's still a plethora of things to fix.
Chris Dembik,
Head of Macroeconomic Research
As the world turns increasingly bipolar, equity markets face harsh times as they transition into the new reality.
Peter Garnry,
Head of Equity Strategy
New alliances and collaborations outside of China may lead to prosperous times in Asia.
Charu Chanana,
Market Strategist
For years, it was thought that the balanced portfolio was a thing of the past. But recent developments may have changed that.
Peter Siks,
Investment Coach
Following a dramatic and volatile 2022 with good returns, a lot of this year's commodity performance may be driven by Chinese politics.
Ole S. Hansen,
Head of Commodity Strategy
2023 could be a tough year for currencies but EUR and JPY may have some upside.
John J. Hardy,
Head of FX Strategy
The commodity-heavy Australian market may have a good start to 2023, as the Chinese focus on growth signals demand for Aussie resources.
Jessica Amir,
Market Strategist
From a near-perfect environment for speculative assets before 2022 to the opposite, crypto faces fundamental challenges.
Mads Eberhardt,
Cryptocurrency Analyst
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)
