NZD/CAD & AUD/CAD: Long term downside risks building - Westpac

Richard Franulovich, Research Analyst at Westpac, suggests that the terms of trade drag on Australia, NZ and Canada is moderating and there appears to be more scope for a nominal GDP growth recovery in Canada than in either Australia or NZ - in the latter cases nominal GDP growth has already stabilised.

Key Quotes

“The relatively stronger energy price story apparently is not yet priced into currency markets either. AUD/CAD is trading at multi month highs just above parity yet a meaningful shift in the relative terms of trade favouring Canada has emerged. NZD/CAD looks just as meaningfully overvalued. Dairy prices materially outperformed energy prices though Q2 in but in recent weeks about half that outperformance has been unwound. Yet, the NZD/CAD cross has barely edged back from recently testing 19-year highs.

Yield spreads are even more emphatically signaling meaningful downside for AUD and NZD against CAD. Two rate cuts from the RBA and RBNZ this year vs a steady hand from the BoC have seen yield spreads move materially in CAD’s favour.

Admittedly Canada’s external accounts are in worse shape than in either Australia or NZ and the BoC sounds less sure about the outlook, noting in early September that the risks to the profile for inflation have, “tilted somewhat to the downside”.

But, those doubts should be assuaged as the economy experiences what is likely to be a very punchy bounce back in the second half. June and July monthly GDP of 0.5% and 0.6% respectively confirm that much of the soggy growth picture in Q2 was a function of disruptions caused by the Fort McMurray wildfires. Energy prices have stabilised, flagging a less weak incomes picture, while PM Trudeau’s fiscal stimulus will soon begin to wash over the economy.

AUD/CAD and NZD/CAD both appear to have a rough 5% downside to bring them closer into line with prevailing relative commodity price trends and yield spreads. That would put AUD/CAD nearer 0.95 and NZD/CAD nearer 0.90.”