Top Trade Idea 2020: Canadian Dollar 2020 Outlook, Yield Advantage Against AUD and NZD

My top trading opportunities in 2019 were going long the Canadian Dollar against currencies such as the Australian and New Zealand Dollars. overall, it was a solid year for the Loonie as it gained about 3.6 and 4.4 percent against the NZD and AUD respectively. Could this performance repeat in the year ahead? It depends on how the Bank of Canada approaches risk to the economic outlook. The central bank has avoided cutting benchmark lending rates, countering the trend from most other developed nations as global growth and world manufacturing output deteriorated.

Bank of Canada Held its Ground (Chart 1)

There are cautious dovish bets for the BOC in 2020 with odds of a 25bp rate cut by October at roughly 50 percent. These are more dovish than from New Zealand but less so than out of Australia. Canada’s economy was rocked by November’s jobs report and if the disappointing trend in data surprises prolongs, we may see the central bank ease. However, Prime Minister Justin Trudeau’s middle-class tax cuts could undermine the urgency of monetary stimulus. BOC Governor Stephen Poloz highlighted the potency of fiscal support in an era of low interest rates. If he steps aside, CAD’s yield advantage in AUD/CAD and NZD/CAD could prove fruitful.

--- Written by Daniel Dubrovsky, Currency Analyst for DailyFX.com

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