CAD forecast to outperform NZD and AUD - BNZ

According to the NAB FX Strategy Team, persistent US-China trade tensions and reducing NAFTA fears implies scope for a decline of more than 5% in both AUD/CAD and NZD/CAD crosses.

Key Quotes: 

“Last week we saw intensification of concerns over US trade actions against China and the likelihood of retaliatory measures from China against the US usurped the FOMC meeting as the key driver of market price action – in equities and FX at least. And Friday night saw higher Canada CPI inflation, with all key core measures now hovering around target at 2%.”

“The price action speaks volumes about the greater vulnerability of the Australian and New Zealand economies relative to Canada in the event of a US-China trade war.”

“Positive news on NAFTA will undoubtedly remove one constraint on the BoC taking further steps along the road to monetary policy normalisation. Canada will also benefit from fiscal-charged US growth.”

“This is at a time when incoming inflation indicators from New Zealand are suggesting the RBNZ is at least a year away from lifting rates and incoming Australian labour market data are reducing the likelihood of higher RBA rates this year.”

“Canada inflation data are showing clear signs of recovery, with the BoC’s inflation target now essentially met alongside a backdrop of still-building inflationary pressure.”

“NAB/BNZ FX Strategy forecasts have AUD/CAD at 0.95 and NZD/CAD at 0.89 a year from now. These forecasts sit well above our estimates for ‘fair value’ based on Purchasing Power Parity that use our 15-year moving average framework. These currently sit around 0.91 for AUD/CAD and 0.83 for NZD/CAD, but would be even lower if we used a longer-term filter.”

“AUD/CAD and NZD/CAD could be headed much lower than suggested by our current forecasts, which have lows of 0.94 and 0.88 respectively in 2019. We emphasise that these are big picture views.”