PDF Archive

Easily share your PDF documents with your contacts, on the Web and Social Networks.

Send a file File manager PDF Toolbox Search Help Contact



UBS3.pdf


Preview of PDF document ubs3.pdf

Page 1 2 3

Text preview


ab

Fixed Income & FX Research
FX - Strategy

UBS Investment Research
FX Morning Adviser

Global

AUDCAD: A Short In the Making

7 November 2013
www.ubs.com/fx

Attention is focused on today’s ECB policy decision and Friday’s US nonfarm
payrolls report, but relative value FX opportunities elsewhere are still worth
monitoring.
The employment picture in Australia showed no improvement overnight and
Canada’s jobs report, due on Friday, could reveal further divergence in labour
market conditions between the two economies (Chart 1).
Economic divergence is one thing, but what really matters for AUDCAD is
whether policy actions follow − otherwise the generous spread between
Australian and Canadian yields may not tighten in CAD’s favour (Chart 2).
Prospects of this seem remote for the present though, given both the RBA and
the BoC have recently dropped their long-held policy biases. The landscape
could change quickly again once the Fed begins to taper, but until then
AUDCAD bears will need patience.
Reserve managers could exert an influence in the meantime, given yield is not
usually their primary consideration. CAD holdings already slightly exceed
AUD exposure in global reserve portfolios, according to the latest IMF
quarterly survey, and ongoing reserve diversification is likely to weigh on
AUDCAD over time.
That’s because there is greater scope for CAD inflows from here. Foreign
ownership of Australian Commonwealth government bonds has reached
saturated levels just above 70%, while the foreign footprint in Canada’s
equivalent bond market stands at just 32%.
US economic outperformance next year could reinforce this AUDCAD
dynamic, at a time when the growth model of emerging market economies
(many of whom are close trading partners of Australia) seems broken.
We remain on alert for an opportunity to sell AUDCAD over the coming
months. The onset of Fed tapering could be a trigger for an even closer look.
Chart 1: Economies moving in opposite directions
9

Chart 2: But Canadian yields still relatively unattractive

Unemployment Rates

Central Govt Bond Yields
5

8
Canada
Australia

Australia

6

3
%

%

7

2

5

1

4

0

Oct-07

Canada

4

Oct-08 Oct-09

Source: Bloomberg, UBS FX Strategy

Oct-10 Oct-11

Oct-12

6m

12m

2y

Source: Bloomberg, UBS FX Strategy

This report has been prepared by UBS Securities Pte. Ltd. (Reg. No. 198500648C)

3y

5y

7y

10y