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GS Favor CAD On Crosses Ahead Of Jackson Hole

CANADA
  • The broad commodity sell-off from mid-June to mid-July has weighed on G10 commodity currencies including AUD, NZD and CAD and price pressures are expected "to remain a significant driver" of these currencies but Goldman see CAD on crosses as remaining their preferred expression out of the G10.
  • Supported by: i) CAD’s positive correlation with the US Dollar so should benefit from their call for higher 10y yields in the US by year-end and upside risks to terminal and neutral rates in the US, ii) their commodity strategists continue to be bullish oil whilst turning more negative on other commodities such as iron ore and iii) Canadian CPI inflation running well above target.
  • They see best expression for CAD strength on these factors is short NZD/CAD; “NZD has a strong positive correlation to global risk, which has recently come under pressure, and a large exposure to Chinese growth, the forecasts for which our economists recently revised lower”.
  • Jackson Hole a potential catalyst for stronger CAD on crosses as even though data dependence is likely emphasized, an aggressive tone on inflation from the Fed could lead both USD and CAD stronger vs other G10 currencies.
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