Our FX strategists argue that pessimism toward the Canadian and Australian dollars may be overdone.
Both Canada and Australia posted weak December employment reports, which weighed on their currencies. For now, we are hesitant to read too much into a single month of jobs data. Most other indicators are pointing to decent economic growth. For example, the monthly GDP report for October showed that the Canadian economy accelerated into the fourth quarter. Real GDP growth could be near 3% yoy in 2013 Q4, almost a full percentage point above the BoC’s forecasts. Also, the leading economic indicators for Canada and Australia have clearly turned higher, pointing to faster growth and/or the need for tighter policies.
Of course, the weakness in the CAD and AUD precedes this month’s employment reports. Two years of below-trend global growth has led to softer commodity prices, placing downward pressure on the AUD and CAD. But it now looks as if the currencies are undershooting commodity prices. For example, the Aussie is less than 10% away from levels that were seen in the mid-1990s. However, the RBA’s commodity price index stands 155% above the levels of the mid-1990s.
Finally, technical indicators are bombed out. Our intermediate term indicators are deeply oversold and speculators have accumulated large short positions. We caution against chasing these currencies lower.
