UBS House View Daily

Thought of the day

05.07 - Think small on diverging policy

As more global central banks begin edging away from ultra-accommodative policy, investor attention has largely been focused on shifts at the Federal Reserve and the European Central Bank, as exemplified by fresh ECB policymaker comments today. But while we maintain our preference for the euro, this week also shows there are opportunities to be found in some of the less widely watched currency pairings, with a long Canada / short Aussie dollar position in particular representing good value.

Our optimism for the Canadian dollar stems from recovering domestic growth, which has risen for six consecutive months, hitting a G7-topping 3.7% in the first quarter. Improving sentiment for oil, with crude prices up about 10% from last month’s low, offers further support. And the Bank of Canada has been vocally hawkish, with Governor Stephen Poloz this week dismissing the need to wait for still-below-target inflation. The market is now pricing in a 65% chance of a rate hike at the July 12 meeting.

Australia’s growth outlook, in contrast, is decidedly less rosy. In our view, the labor market contains greater slack than the 5.5% jobless rate indicates, which will continue to constrain wage growth. The housing construction boom looks past its prime, while household consumption remains reliant on dwindling savings, which are already at a 10-year low. The FX market positioned this Tuesday for a hawkish surprise, but the RBA’s neutral stance for July matched our expectations, and minor policy language edits hint a growth downgrade may materialize in August.

So, we remain short the AUD against the CAD, and expect the divergence in central bank policy between these two countries will become more evident over the coming months, with the RBA likely to remain on hold until the second half of 2018.

Chart of the day

Australia's average borrowing rate vs. RBA cash rate has doubled since 2009

Spread between the economy-wide weighted average borrowing rate and the RBA cash rate, % 3-month average

Think small on diverging policy

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