AUD, NZD, CAD under pressure on Fed tightening prospects – Danske Bank

Analysts at Danske Bank assessed the prospects for AUD, CAD and NZD in light of potential extra tightening conditions in the US.

Key Quotes

“The global business cycle environment has turned increasingly positive for the traditional G10 and commodity currencies over the last months”.

“Meanwhile, we still think the upturn in China will prove temporary post the Chinese Communist Congress in autumn which limits the medium- to longer- term upside potential”.

“Also, with the US tightening cycle likely to continue amid indications of a forthcoming re-acceleration in the US economy it should add some downside pressures on the three currencies vis-à-vis- the USD”.

“In terms of central bank pricing we pencil in one Bank of Canada hike over the coming year (markets price almost two). We do not expect Reserve Bank of Australia or Reserve Bank of New Zealand to hike rates in the coming year (markets price a little more than 50% probability for both)”.

“As such we regard relative rates as negative for the three. Fundamentally, CAD seems undervalued while AUD and NZD seem overvalued (versus USD). We now forecast AUD/USD at 0.78 in 1M (previously 0.77), 0.76 in 3M (0.75), 0.75 in 6M (0.74) and 0.75 in 12M (0.74), NZD/USD at 0.72 in 1M (unchanged), 0.71 in 3M (unchanged), 0.70 in 6M (unchanged) and 0.70 in 12M (unchanged) and finally USD/CAD at 1.28 in 1M (unchanged), 1.30 in 3M (unchanged), 1.33 in 6M (unchanged) and 1.34 in 12M (unchanged)”.