Currencies | Aug 22 2012
– CIBC updates currency views
– US dollar may move higher
– Commodity currencies at elevated levels
– Pressures on euro to continue
– Yen may see continued support
By Chris Shaw
During August there has been some cautious optimism with respect to the global growth outlook and CIBC World Markets notes this has prompted a rally in risk assets and currencies. One consequence of this is the US dollar's safe haven status has been slightly diminished.
Despite this CIBC suggests the next move for the dollar could be to the upside, as two key alternatives in the euro and the pound sterling are associated with economies in double-dip recessions. As well, any disappointing news with respect to growth in China cold impact on commodity currencies, which would also be supportive for the US dollar.
Another variable is the potential for further quantitative easing measures by the US Federal Reserve, as CIBC suggests any delays to such moves would also be dollar supportive. Economic data is offering some evidence to suggest delays may eventuate, as the US economy continues to growth at a moderate pace.
With respect to the commodity currencies, CIBC suggests both the Canadian and Australian dollars are trading at unsustainable levels. While like Australia, Canada continues to benefit from a AAA sovereign rating, related capital inflows tend to abate when the Canadian dollar moves above parity thus offering less upside.
For CIBC the catalysts for a further rally in the Canadian dollar are difficult to identify, as interest rates are unlikely to move higher and there is modest global demand for Canadian exports at present. Given this, CIBC is forecasting the Canadian dollar will fluctuate around parity against the US dollar in coming quarters.
The Australian dollar remains the most overvalued major currency in CIBC's view, which reflects Australia's yield attraction over other AAA sovereigns. Long positions in the Aussie have been extended ahead of economic fundamentals according to CIBC, as business and consumer surveys remain suggestive of a deceleration in activity in coming months.
At the same time the deceleration in the Chinese economy remains a concern given Australia's export leverage to Chinese demand. CIBC suggests if the correlation between iron ore and copper prices can reconnect, the Australian dollar should come under pressure.
A lack of action in terms of saving the euro has kept that currency just above year-to-date lows and CIBC suggests the longer politicians and the European Central Bank (ECB) take to deliver decisive action the greater the risks to the currency.
For CIBC, the euro is vulnerable to further weakening for as long as it takes the ECB to show greater resolve and for growth to return to the Euro region.
The yen has been strong since the start of the fiscal year and CIBC expects the Japanese currency will continue to trade at elevated levels given risk averse contributes such as a current account surplus and the fact domestic investors remain onshore in periods of global economic uncertainty.
CIBC notes yield spreads continue to be a driver of swings in the yen. If there is another round of global risk aversion before the end of this year CIBC sees scope for a reversal in US treasury-Japanese government bond spreads, so capping upside gains in the USDJPY.
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