Viraj Patel, Foreign Exchange Strategist at ING, expects that the AUD and NZD carry advantage will decline as US yield curve steepens but greater infrastructure investment could lift metal prices and support AUD while the CAD is likely to benefit from a stronger US economy if NAFTA doesn’t become an issue
Key Quotes
“Theme 1: Coping with global yield curve steepening
The Trump reflationary theme, and subsequent rise in US yields, has significantly eroded the carry advantage of the dollar-bloc currencies. When controlling for risk and spillback effects, NZD and AUD are vulnerable to another sharp rise US 10Y yields.”
“Theme 2: Will the global infrastructure investment drive lift metals?
Infrastructure investment will be one of the key buzz phrases of 2017; the pleas of global institutions – such as the IMF and World Bank – for greater public investment are finally being heard by world leaders. A by-product of this global shift towards fiscal activism is the added demand for natural resources (namely industrial metals if we’re talking about infrastructure investment); we note that such expectations are already being priced into markets, with the CRB’s industrial metal index up 17% since November. This divergence in commodity price dynamics could provide either near-term tailwinds or headwinds to the dollar-bloc currencies: AUD may remain supported from expectations of higher iron ore and coal prices, while CAD would come under pressure from soft oil prices (particularly if the Trump administration lifts the ban on US oil exports). Still, it is worth bearing in mind that this is an expectations game; near-term price action will be of a speculative nature and any tangible change in supply/demand dynamics are unlikely to be felt in 2017.”
“Theme 3: US, China and deglobalisation…
One of the major themes for global markets next year will be US-China political relations and whether we will see a pickup in trade-hampering protectionist policies. Irrespective of the fiscal story, commodity exporters would be negatively affected over the medium-term from a structural slowdown in global trade: the consequence will be further dollar-bloc FX adjustment to help cure the ‘Dutch disease’ in these economies. As for 2017, we may see diverging US-China growth expectations marginally support CAD over AUD and NZD.”
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