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Short AUD/CAD as we head into 2016 – RBC CM

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 29, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Delhi) – Research Team at RBC Capital Markets, suggests to short the AUD/CAD pair in 2016.

    Key Quotes

    “Net exportsias a key hope for growth. Since it peaked in March 2013, trade-weighted AUD has fallen by 21%. Over a similar time period, trade-weighted CAD is down by a similar amount (-24% since Sept 2012). Despite the sharp currency depreciations, non-commodity exports have been slow to materialize. Nevertheless, in Canada there are signs that non-commodity exports are beginning to pick up and Canada is gaining market share in global trade, while in Australia, non-commodity exports are still lagging.”

    “In the first half of 2016, short AUD/CAD could also feel the benefit from a weather phenomenon – El Niño. The UN’s World Meteorological Organization has said this year’s El Niño is on track to be among the “worst ever”. A strong El Niño is expected to bring drought to large parts of the Southern hemisphere including Australia and New Zealand which would push up soft commodity prices. But the effect is negative for AUD and NZD, as the hit to production outweighs the benefit of higher prices. Meanwhile El Niño is growth enhancing for the US, Canada and Europe.”

    “Short AUD/CAD may be helped at the margin by diverging fiscal policy. The new Canadian government plans on running small fiscal deficits over the next two years (~CAD10bn/year or ~0.5%/GDP). The effect is likely to be back-loaded in 2016 as the bulk of the stimulus is due to come from infrastructure spending which takes time to implement (and the budget itself is not due until Q1 2016). Meanwhile in Australia, the cyclically-adjusted deficit is due to shrink further, as the government aims for a balanced budget (the OECD estimates a cyclically adjusted fiscal balance of -0.8%/GDP in 2015 shrinking to -0.5%/GDP in 2016).”

    “The AUD/CAD trade will also be driven by relative commodity prices. We do not forecast those directly but our commodity analysts look for a recovery in energy prices in 2016 (WTI forecasts USD57/bbl in 2016 and USD65/bbl in 2017) while they see some further downward pressure on iron ore.”

    “We are holding a 0.90/0.85 AUD/CAD put spread in our portfolio already (exp 17 March 2016) and look to add to the position in spot when we see good entry levels.”
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