HSBC

Fed’s Delta doubt

Some may quickly argue that such concerns about higher front-end US Treasury yields are not warranted. After all, the US economy is losing some speed and as a result there is a possibility that the Fed could soften its message. It has been well discussed how the Delta variant in the US has been challenging and that has been cited as a near-term downside risk by the Fed. A potential delay in the slowing of the Fed’s balance sheet would test the USD, although we believe it would be temporary. Once the spread of the Delta variant shows a sign of peaking, as it has done elsewhere, then the Fed would presumably resume its path towards gradual normalisation. In other words, the Fed may have some doubts about the US economy in the near-term, but it is unlikely to abandon its long-term view and plan for monetary policy normalisation.

Commodity prices may struggle to advance amid concerns about a peaking out in global growth. The AUD is especially sensitive to these concerns, even among commodity currencies, though its relationship has wavered lately with risk appetite the more dominant consideration. As the grip of RORO fades, the more challenging backdrop for commodity markets will likely act as a constraint on any AUD bounce.

China’s slowing economic momentum will likely continue to be echoed in a softer AUD, especially if it is echoed in weaker mainland Chinese equity markets to which the AUD is highly correlated. While China’s economic policy is being eased to address the slowdown, the AUD’s ties to China and the region leaves the currency exposed to growth concerns.

RBC Capital Markets

Canada saw record net capital outflows in Q2, pushing its basic balance to a deep deficit. Traditionally Canada has relied on foreign capital to plug its savings shortfall so it’s reasonable to ask whether this is a worry for CAD.

Foreigners have not been liquidating Canadian assets in any meaningful amounts; this has been caused by Canadians buying foreign assets, and foreign equities in particular.

We put that down to the savings glut created by the pandemic, which also shows up as a dramatic improvement in Canada’s current account position.

Neither is likely to survive the recovery, but that also makes these outflows less of a currency concern. The best we can say is that CAD may end up performing better in our month-end hedging model.