CAD: Hot on the Commodity Bloc – Deutsche Bank
Robin Winkler, Strategist at Deutsche Bank, suggests that valuation
differentials across the dollar bloc are at all-time highs and the
Antipodes are 15% too expensive on PPP while CAD is 5% too cheap.
Key Quotes
“This
spread is historically extreme and offers relative value in the medium
term. Other structural factors are also aligned for CAD to outperform
the Antipodes.
First, Canada may see faster terms-of-trade
improvement than its peers. Our commodity strategists expect iron ore
prices to revisit $40 in the second half of the year, and milk prices
show no sign of being lifted by European supply cuts.
Canadian
exporters, by contrast, should start to benefit from the process of
supply rebalancing being firmly underway in crude oil, with our
strategists expecting WTI to rise toward $47 by year-end. Similarly,
their end-2018 forecasts of $49 for iron ore and $65 for WTI are
consistent with AUD/CAD falling towards a fair value of 0.82 on our PPP
model.
Second, relative domestic business cycles are unlikely to
support Antipodean outperformance indefinitely. Investment in Australia
and New Zealand is likely to decline further as the construction booms
abate. Slowing house price inflation also threatens the recent
acceleration in private consumption. And unlike in Canada, there is
little scope left for further fiscal stimulus instead of monetary
easing.
Third, Canada’s productivity growth has not lagged
Australia’s significantly. Since the GFC, when all three currencies were
close to PPP in effective terms, labour productivity has grown by 9% in
Australia versus 6% in Canada. Effectively the gap is even smaller
since Australia’s competitors in Asia have also achieved higher
productivity growth than Canada’s competitors in North America.
But
to the extent that Australia enjoys a productivity edge over Canada,
this is not nearly enough to compensate for its extreme currency
overvaluation. For New Zealand, the issue does not even arise as its
economy has had one of the poorest productivity track records in the
developed world for many decades, and especially in the crucial
tradables sector.
Hence, we expect CAD to outperform its dollar
bloc peers as they all converge to PPP. In half-life terms, the
historical speed of convergence is two years for NZD and six months more
for AUD and CAD.”
(Market News Provided by FXstreet)
