Forecasts Update: AUD, NZD, CAD, Crude Oil, Gold

Commodity currencies were strong last month as market sentiment improved and investors were more interested in higher-yield assets. Certainly, strength in commodity prices also lent supports to currencies. In the 4-week period since our last update, AUDUSD and NZDUSD gained more than +4% while USDCAD slid -1.7%. For commodities, crude oil price was stuck within a range while gold got an upward breakout.

Below is our and the market's outlook on some of the commodity currencies, crude oil and gold for the coming month.

AUDUSD: Despite strong 2Q09 GDP data, worse-than-expected retail sales and employment data signaled the economic outlook in Australia may not be as robust as previously expected. Retail sales in July declined -1% after a -0.8% drop in the prior month while employment in August dropped -27.1K following a 33.6K increase in July.

Although RBA remains to be anticipated as the first central bank to raise interest rate, market expectation has been pushed back somehow. Investors prefer to see how the market develops as the government's fiscal supports wane.

Since our last update, AUDUSD rose another +4.1%. Aussie surged to 13-month high at 0.8775 last week on broad-based weakness in USD before pulling back to 0.86 level.

During the 4-week period, several investment banks have upgraded Aussie's outlook. While recent rally looks excessive, there's still possibility for the currency pair to surprise on the upside.

Credit Suisse is bullish on AUDUSD and believes 'the recent string of better-than-expected data from the Australian economy argues compellingly for the Reserve Bank of Australia to raise its policy rate by year-end. This would make it the first G10 central bank to hike in this cycle. We think the RBA needs to raise rates by about 175bps to take rates to neutral, implying significant improvement in carry levels for the Aussie'.

Goldman Sachs sees the possibility for the Aussie to overshoot: '1) the already-high interest rate spreads may widen further; 2) after recording the mildest downturn in the developed world, [Australia will have] the strongest growth among the major developed nations in 2010; 3) the AUD correlates strongly with the improving global industrial cycle and Australia's terms of trade is set to rise in 2010; 4) Australia has been a recipient of quality capital inflow in recent quarters; 5) as volatility in FX markets declines, carry could become an independent source of AUD strength'.

NZDUSD: New Zealand dollar has rallied since March and valuation has become quite stretched given the economic condition in the nation. While acknowledged improvements in economic data, RBNZ reiterated its dovish stance in monetary policy and stated the current low interest rate will remain until June 2010.

However, we dare not say New Zealand dollar will have deep correction for current level although, theoretically, it should. It's because USD is weak and should get weaker.

ANZ sees opportunity for NZD to head further north with the support of weak dollar: 'The move looks mature, but support levels at 0.69 now look like how the support level at 0.6630 proved, impenetrable… it is hard to see the market below 0.69 before some catalyst/calamity again envelopes the world, or if the market breaks from this risk sentiment type trade. At present, people who own the currency aren't selling and the people who are short are getting squeezed'.

On the other hand, Bank of New Zealand sees limited upside for NZD: 'Not only is our risk appetite index now sitting back around its long-term average, but NZ-US interest rate spreads have widened and NZ commodity prices have recovered. Our short-term valuation model suggests a 'fair value' range for the NZD/USD of 0.6850-0.7050… there isn't a compelling fundamental reason to chase the NZD/USD higher from here'.

USDCAD: Similar to other commodity currencies, Canadian dollar strengthened against the dollar and gained +1.7% since our last update. At September's meeting, BOC stated that appreciation in CAD is 'a risk to growth and the return of inflation to target'. Moreover, BOC's commitment to keeping the policy rate at 0.25% until Q2 2010 offers little incentive for CAD to go higher. That said, improved market sentiments and lure for risky assets may continue to lift CAD further although current price level has already reached the 'fair value' of CAD.

Barclays Capital has turned more bullish on CAD and look for USD/CAD to 'move to parity and possibly below on a 6- 12m horizon' as risk-correlated currencies will likely continue to advance, even if more slowly than over the past three months, the Canadian economic outlook is more positive, and the Bank of Canada is increasingly unlikely to alter policy to weaken CAD'.

TD Bank remains bullish on CAD as expects USDCAD to make new lows in the 1.05 range over the coming weeks before driving to parity by year-end. 'Although the risk of currency intervention will intensify a bit as we head towards the 1.03-1.04 area, we think that as long as the move to parity is an orderly one, the BOC will remain on the sidelines, and will simply keep rates on hold for longer if it feels that the strength in the Canadian dollar is beginning to bite'.

WTI Crude Oil: WTI crude traded within a range of 65-75 in the past 4 week. On one hand, improvements in macro-economic outlook have lifted market sentiment and investors' interests in risky assets. This lent support to oil price. On the other hand, industry-specific fundamentals remained weak as inventory levels were high and fuel demands were lower than historical average. These did not justify oil price to rise above 75. The tug of war between robust macro and sluggish fundamentals was responsible for the range-bound trading seen in the past week and we expect the situation will continue in the coming month.

Deutsche Bank believes strength in oil price despite ample supply and weak demand has been driven by decline in USD and rally in stock markets. However, these factors may not last until 1Q2010 Deutsche Bank expects that 'poor underlying fundamentals and the possibility for a mid-2010 economic setback are not getting attention commensurate with the risk… expect average oil prices near USD55/bbl in 2010, rising to USD80/bbl in 2011 as the world's economic footing improves and traditional oil supply and demand fundamentals come more into balance'.

While anticipating oil to stay range-bounded, Credit Suisse believes that 'demand for crude oil is likely to increase in the months ahead along with the acceleration in US economic activity. On a global scale, OPEC marginally upgraded its demand forecasts for 2009 and 2010 in its latest monthly report'.

Comex Gold: Gold price finished several months' of range-trading pattern and broke above 1000 in early September. Current rally has been driven by weakness in USD and robustness of investment demands. We believe these 2 factors will continue to direct gold price in coming months.

Concerning demand/supply condition, the World gold Council's report showed that total identifiable demand in increased +14.6% yoy to 1743.4 metric tons in 1H09. However, much of which was driven by investment demand. Jewelry demand in fact plunged -22.3% during the period. In the second half of the year, we believe demand should recover modestly as economy turns better. Total supply increased +27.7% yoy to 2124 metric tons in 1H09 as driven by higher mine supply and scrap supplies.

Citigroup believes 'further weakening USD will provide continuing support but inflationary pressures are abating and real interest rates have spiked'. Its forecasts on gold is 964 1H10 and 966 for full year 2010.

HSBC said in its special report gold's current rally has been driven by several factors: 'Gold prices are subject to a myriad of influences. Investor reactions to the ongoing economic crisis are the dominant influence on gold prices and the central factor behind the current rally to 1000, in our view. Gold was supported last year by investors seeking a 'safe haven' asset to counter the dislocation of the financial system. Gold featured prominently as the one asset class that could reasonably be expected to protect investors' wealth under such circumstances. By early this year, we believe that the main theme for gold revolved around its qualities as a potential inflation hedge, given the extraordinary amounts of liquidity that global central banks deployed to prevent a deflationary environment and the shift towards quantitative easing by Fed since followed by other central banks. Typically, gold responds vigorously to unanticipated changes in inflationary expectations. More recently, concerns centered on the USD, with some even questioning the USD's long term role as the world's reserve currency. Gold traditionally trades inversely to the USD and pushed over 1000 as the USD fell to one-year lows to the EUR and CHF'.