FYI | Jun 28 2006
The Canadian dollar has had a fantastic last couple of years, strengthening against the US dollar, from 1.40 to 1.12, and against the Australian dollar, from 10.5 to 0.82, however, TD Securities’ chief strategist Stephen Koukoulas is of the view that at least some of this strength is about to give way.
Looking at seven key influencing factors, Koukoulas sees little room for doubt.
Firstly, GDP momentum is seen as topping out in Canada, whereas Australia’s is currently 3.1% and is seen as accelerating up to 3.5% in 2007.
The 150 basis point gap in interest rates is also viewed as strongly favouring the AUD, as is the 125 basis point gap in 10-year bond rates.
As for exports, the strategist points to clear weakness in Canadian exports as suggesting the CAD is overvalued and "unambiguous strength" in Australian exports as suggesting the AUD is now undervalued.
Commodity prices are expected to have a similar impact on both currencies, Koukoulas says, but when it comes to trading partners, Asia takes 60% of Australian exports and the region in general is seen as strong, particularly China and Japan. While the US takes 80% in Canada’s exports and it looks to be slowing, he says.
Finally, in terms of the trade balance, Australia has smaller deficits and a risk of a surplus, while Canada has smaller surpluses and a risk of a deficit, the strategist adds.
This, he says, suggests "significant outperformance" for the AUD against the CAD. Koukoulas recommends a Buy and has a 1-3 month target of 0.8600, compared to the spot of 0.8220.
For investors looking for a short term opportunity, Danske Bank predicts the Norges Bank will issue a hawkish statement at its June 29 meeting, which will "pave the way for more frequent rate hikes going forward."
The anticipated statement should reverse some of the NOK’s recent weakness against the EUR and SEK, Danske Bank says, and they recommend selling EUR/NOK at 7.923, looking for a move to 7.78 over the northern hemisphere summer, with a stop at 8.00 or buying NOK/SEK at 1.1650 for a move to 1.1900.
By Terry Hughes