CAD: Hot on the commodity bloc – Deutsche Bank

By FXStreet 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 …read more

Source:: FX Street