CAD – Loose BoC Monetary Policy to Weigh on CAD
A worsening global economic background does not bode well for the CAD. Economists have begun to downgrade their 2012 Canadian outlook and GDP forecasts as the gloom from Europe spills over into Canada. This hints that the BoC will loosen monetary policy in Q2 as events outside of Canada begin to influence the local macroeconomic outlook. Continued declines in commodity prices may also have a negative effect on the CAD. Since its peak in April the Thomson Reuters/Jefferies CRB Commodity Index has declined 17.8%. Crude oil prices have risen to close out the year near the $100 level, though any drop in prices will likely limit CAD gains. Perhaps in H2 the CAD will perform well should global growth and risk sentiment bounce back.
GBP – AAA Rating Won’t Save Sterling
Sterling is caught between a rock and a hard place. On one had the GBP continues to receive strong inflows due to the European debt crisis. The rejection of the new euro zone pact by Prime Minister David Cameron and the UK AAA rating support continued real money flows. The safe haven status of the GBP is highlighted by the yield on the 10-year gilt falling to a record low under the 2% level.
However, the UK economy continues to struggle. 2012 growth forecasts have been revised lower by both the Bank of England and the government. The BoE expects inflation to fall sharply over the course of the year with the risk of deflation creeping into the UK economy. The reversal of price pressures looks to have begun as headline inflation may have topped out in September at 5.2%. Thus the BoE is set to begin another round of quantitative easing (QE) in Q1 which will likely weigh on the GBP.
AUD – Interest Rate Differentials to Drive AUD
Investors continue to prefer commodity currencies despite the decline in commodity prices. Since its peak in April the Thomson Reuters/Jefferies CRB Commodity Index has declined 17.8%, while the AUD/USD has declined by only 7%. The tepid decline in the value of the AUD/USD also comes in the face of the European debt crisis and a slowing Chinese economy. Thus we may assume that investors continue to buy the AUD based on interest rate differentials and perhaps the country’s AAA credit rating.
The RBA has cut interest rates in their previous two consecutive meetings though rates currently stand at 4.25%, more than 175 bp above the next G-10 currency the NZD at 2.50%. The interest rate differential is still remarkable. While a continuation of the European debt crisis may weigh on the higher yielding AUD, should positive market sentiment return there may be a return of the carry trade, fueling further support for the AUD.
Gold – Gold is Not a Safe Haven Asset
If there are two things that investors have learned this year it is the Middle East is a hotbed for instability and gold is not a safe haven asset. Since reaching its high in September spot gold prices have fallen 18%. The outlook for gold can be tied into expectations for the euro zone. Should investors begin take a more desperate position for the fate of the EUR, spot gold prices are likely to suffer as well. It should also be noted that the price of spot gold has broken its long term uptrend from October 2008.
