EN:RBS favours going long on Canadian Dollar, Australian dollar
Royal Bank of Scotland Group plc (LON:RBS) have said today that they favour being long on the Australian dollar and Canadian dollar.
The reason? The possibility that markets will react strongly to any upside surprises in the data releases due this week.
"Following the recent abrupt pullback in policy rate expectations across most of the G10, questions marks now linger over to what extent this has been overdone. Given that a lot of bad news has now been priced in, the market is likely to be much more sensitive to any upside surprises in the data than downside. As a result we are cautiously risk positive this week, favouring long exposure in the AUD and CAD (two of the countries where interest rate expectations have been reined in the most) against the USD," says an exchange rate note from RBS.
In Australia, the market is currently pricing in a 40% chance of a 50bp rate cut in September and 121bp of cuts over the next 12 months.
However, RBS Economics do not see the RBA cutting rates in the absence of bank funding pressures, a fall in commodity demand and a further loss of confidence.
Despite a small overshoot relative to consensus, UK CPI is more or less consistent with the Bank of England's forecasts and thus will not be much of a positive for GBP.
"However, it may get people thinking that the move lower in rate expectations has gone far enough, with persistently high inflation still providing an obstacle to further asset purchases. Focus now shifts to today's meeting between Merkel and Sarkozy," say RBS.
French and German newspapers continue to give conflicting signals over what will be announced, although it looks as though German opposition to Eurobonds may be easing. However, a lack of any concrete suggestion that Eurobonds are being considered could disappoint markets.
Soft Euro-zone Q2 GDP is also a negative for the EUR, as it puts increased focus on the difficulties Euro area countries face in improving their fiscal positions and supports the view that the ECB will be unable to justify higher rates say analysts.
