Economists at Credit Suisse look to fade strength in G10 commodity FX. They see a number of developments that leave them less convinced about the prospects for the Australian dollar, New Zealand dollar and Canadian dollar over the next three months.

Further USD strength against G10 commodity FX

“Central banks have surprised sharply on the hawkish side of market expectations in Q2 so far, leading rates markets to price in even more aggressive policy tightening schedules than before. This leaves much less scope for developments that further hawkish policy expectations at a local idiosyncratic level. Strength in commodities prices also appears to have peaked for the time being, with the prices of the likes of iron ore, crude and dairy under pressure”

“The Chinese leadership’s vocal commitment to a Zero Covid approach, and the low probability of a change in approach ahead of the Chinese Communist Party Congress (still far out, in November), reduces the likelihood of a sudden improvement in the near-term growth outlook. This arguably is a much more direct concern for Australia and New Zealand than for Canada, and is likely to be reflected in ongoing CAD outperformance, even if limited, against both AUD and NZD.”

“Over the past several months, the hawkish repricing of monetary policy expectations across the G10 spectrum has also coincided with terminal rates expectations for Canada, Australia and New Zealand rising at much faster pace than for the US – despite the leading role played by the Fed in driving the move starting in Q421. We see this development as creating potential for disappointment over the medium-term.”