Calling Poloz’s Bluff – Short Canadian Dollar

Back in Jan-2015, Gov. Stephen Poloz outlined the bank’s rationale for a rate cut and explained that the bank had relied on a framework in which their base case expectation for crude oil prices was that it would remain around $60 for the next two years, i.e. 2015-2017, and considering this base case that it was prudent to provide some support to the economy in the form of a rate cut to compensate for lower future oil revenues. As we all know, the reality for crude oil turned out to be quite different.

At the most recent monetary policy meeting, the BOC hiked its policy interest rate by 25 bp; what makes it strange is that the year-over-year rate of growth of Canadian core CPI is the lowest it has been going as far back as the 80s!

Crude oil’s price stabilization since early 2016 has led to a substantial unwinding of the CAD shorts, which has further fuelled strong rallies in all CAD pairs. In our view, this CAD rally is about to lose its steam; we have initiated short positions in CAD against the USD, the EUR, and the GBP. The main risk to our trades is that crude oil prices firm from here. While we think the chances of this are low, we will closely watch the crude oil market for signs of strength and continue to evolve our thinking should it be necessary.

Please click here to read the entire article.

Rigel’s Currency Corner – Long GBP/AUD

This article is a continuation of our short Australian dollar “AUD” thesis. In this post, we zoom in on the battered British Pound Sterling “GBP”. We are of the view that all the negative news (BREXIT, lack of a clear majority in the parliament, Carney’s recent remarks) is most likely priced in to the GBP. On the other side of the equation, we see plenty of signs that China is most likely headed into a recession and we don’t think this has been priced in to the AUD.

  • China iron ore prices show no signs of bottoming. The pain continues!
  • There has been a sharp turn around in China’s inflation surprise index. With the demographic time bomb that is ticking in China, it is deflation surprise that we should be interested in, not inflation surprise!
  • China’s broad money, as measured by M3, grew at an average rate of around 15% from 2001 to 2013. It started decelerating in 2014 and is continuing to decelerate. It is now growing at a year over year rate of just over 10%! Decelerating money supply is a harbinger of ‘slowing economic activity’ / recession.
  • What is even more alarming is that China’s yield curve, as measured by 10 year yield minus 2 year yield, has now inverted. Another warning sign of a recession to come!
  • All signs are now pointing to a recession in China and being short AUD is a sure way to play that game.

To continue reading, please click here.

%d bloggers like this: