Goldman with the outlook.
AUD, NZD, & CAD: Caution signs. Cyclical G10 currencies, AUD, NZD, and CAD, have underperformed in August.
After touching or nearly-reaching our 3-month targets, each has doubled back weaker versus the Dollar over the past month.
Risk has been under pressure and could be weighing on the more cyclical parts of the FX market.
But some of this weakness seems unique to AUD, NZD, and CAD.
All three currencies have clearly underperformed versus a basket of higher-carry EM, suggesting that factors other than risk may be putting downward pressure on the commodity G10s (Exhibit 2).
We have found that AUD and NZD’s beta to risk is very similar to that of high carry currencies—funding a carry basket out of AUD, for example, significantly reduces the basket’s beta to the S&P 500.
In other words, this underperformance is somewhat unusual, and a shift in domestic policy expectations is likely part of the explanation for this underperformance.
Terminal rate pricing has declined in all three regions over the past month, and our economists have recently pulled forward their cut forecasts for both the RBNZ and the BoC (Exhibit 3).
We think it makes sense to attach more caution to these currencies given their softer domestic backdrops.
But given that pricing was only recently at the highs, and we see a number of catalysts that could drive the Dollar lower over the near term, we think they could still benefit from another bout of USD weakness.
I would add that the Chinese golden depression is another headwind to slow any bid.
