NZD and CAD are the cheapest G10 currencies – TDS

Economists at TD Securities prefer to focus on currencies where there is no ambiguity in the policy stance. The Bank of Canada (BoC), the Reserve Bank of New Zealand (RBNZ) and Norges remain on the "hawkish" frontlines while the Reserve Bank of Australia (RBA) has started to soften up. The CAD and the NZD are among the cheapest currencies in the G10 and there is merit in pursuing upside in the coming weeks.

CAD and NZ domestic backdrops add more fuel to the fire

“The BOC, RBNZ and Norges provide the clearest contrast from the rest of its peers, though the broader G10 seems to be showing signs of FOMO. Most recently, the RBA has softened its dovish tone in spite of more restrictive lockdown measures amidst a COVID-19 outbreak and slow vaccinations.”

“While the RBA does not appear to be in a rush to normalize the cash rate and has retained the April 2024 YCC target bond, the statement no longer maintains ‘2024 at the earliest’. Moreover, the Governor seems to have downplayed the impact of slow vaccinations on the medium-term outlook and the RBA has slowed its asset purchases. All in all, we do not think this is particularly strong enough to entice a major revival in AUD longs. Nonetheless, we think it should, at a minimum, reinforce the 2021 lows and the 200-DMA near 0.76 as key technical support and thresholds for AUD/USD. The MACD does point to a turnaround in price action/sentiment in AUD/USD.”

“The Q2 NZIER Business Survey points to a fairly strong turnaround in the coming six months with hiring intentions and investment shifting meaningfully higher. This has compelled speculation that the RBNZ might hike as soon as this year. While we have penciled in fall of 2022, the macro and policy dichotomy between the antipodes suggests that AUDNZD rallies should be faded, and EURNZD still has runway to make a retest of 1.65.”

“A strong Business Outlook Survey is likely to underpin the BoC's sentiment at next week's policy decision. What's more, last week's April industry level GDP report was far less negative than expected, which implies very little revision to the Bank's forecast as Q2 GDP is tracking in the low 3% compared to the BoC's 3.5% from the April MPR.” 

“The NZD and the CAD are among the cheapest in the G10 at nearly 3%. While we see some merit in pursuing this against the USD, we certainly find comfort against the traditional 'funders' and even against the AUD. 1.25 looks to be the local top in USD/CAD for now, and we think fading rallies into next week's BoC meeting is appropriate.”