Goldman Sachs: Go Long CAD vs. AUD & JPY.

Goldman Sachs have initiated a trade recommendation to “go long CAD versus an equally-weighted basket of AUD and JPY with a spot return target of 104 and a stop of 98. The trade target roughly translates to the following levels for the individual USD crosses: USD/CAD at C$1.24, AUD/USD at $0.705, and USD/JPY at Y118.”

• “As of the December employment report, the unemployment rate in Canada is only about 0.2-0.3ppt above its pre-pandemic levels and the employment-to-population ratio has nearly returned to where it stood back in February 2020. Moreover, the average of the BoC’s preferred core inflation measures is running at 2.7%. Our economists expect the BoC to hike rates at the January 26 meeting, but have also highlighted that it’s a very close call between March/April and will likely depend on incoming data in the coming weeks - specifically the Business Outlook Survey (released on January 17) and the December CPI report (released on January 19) - as well as short-term considerations around the ongoing omicron outbreak.”
• “Nonetheless, the Canadian economy has now reached a state that likely calls for interest rate hikes, with the BoC’s last MPR estimating that the output gap had narrowed due to still-ongoing supply constraints and was likely to close in the middle quarters of 2022, though the timing was uncertain. Meanwhile, we expect the economy to be further supported by higher oil prices. Thus, we recommend going long CAD and funding out of AUD and JPY for exposure to potentially higher DM bond yields alongside Asia underperformance.”