Investors should buy Australia's dollar against Canada's as the interest-rate gap between the two nations may shrink less than traders expect, TD Securities said.
Australia's dollar is the third-worst performer among the 16 most-active currencies versus Canada's dollar in the past month as investors bet the Reserve Bank of Australia will lower borrowing costs by more than the Bank of Canada in coming months. The yield advantage of two-year Australian government bonds over similar-maturity Canadian bonds shrank to 2.98 percentage points from 3 percentage points on Aug. 29.
``Possibly too much has been priced into the Australian interest-rate easing cycle and we could see some weakness in Canada, so interest rates may not narrow as much as people expect,'' said Joshua Williamson, a senior strategist at TD Securities in Sydney. ``If we do see the BOC cut and the RBA not cut as much as the market expects, that's going to have some significant re-pricing in terms of the cross-currencies.''
Australia's dollar traded at 91.05 Canadian cents at 3:44 p.m. in Sydney from 91.23 late in New York on Aug. 29. The currency, known as the Aussie, touched 89.22 on Aug. 27, the lowest since Feb. 14.
TD Securities recommended buying Australia's dollar at 90.50 Canadian cents, with a target of 93.5, with an automatic instruction to sell the Aussie at 88.75 in case the bet goes the wrong way. The 93.50 level would be the currency's strongest since Aug. 13.
Business Investment -The Aussie may extend its 2 percent rally from the six- month low of 89.22 Canadian cents reached Aug. 27 after a government report last week showed business investment rose more than twice as much economists forecast in the second quarter as mining companies spent extra on machinery and equipment to meet demand from China.
``The business sector is on fire with strong investment growth in the quarter and an extremely buoyant outlook for planned investment over the next year,'' Williamson and Stephen Koukoulas, London-based head of global foreign exchange and fixed income strategy, wrote in a client note dated today. Benchmark interest rates are 7.25 percent in Australia and 3 percent in Canada, compared with 2 percent in the U.S. and 0.5 percent in Japan.
Traders expect the RBA will lower borrowing costs by 1.06 points over the next 12 months, while they forecast the Bank of Canada will cut its benchmark by half a point within the next year, according to Credit Suisse Group indexes based on interest-rate swaps. The RBA's next rate decision is tomorrow and the Bank of Canada's is on Sept. 3.
`Clearly Soggy' Canada's dollar has fallen versus 11 of the 16 major currencies in the past month. The Bank of Canada reduced interest rates four times from December through April to 3 percent to support a faltering economy.
The world's eighth-largest economy expanded less than economists forecast in the second quarter, a government report showed last week, when the currency dropped 0.6 percent versus Australia's dollar. ``The Canadian economy is clearly soggy and the market is looking for interest-rate cuts in the months ahead,'' Williamson wrote.