Over the past few weeks EUR based investors have stepped up their examination of safe haven trades should the outlook for the Eurozone continue to deteriorate.  The credentials of the AUD and the Australian bond market are seen by many as having diversification credentials. 

The reasons for this are plenty; the Australian economy has a strong exposure to Asia which helped it avoid recession after the 2008 financial crisis.  In turn strong growth has led to a positive carry; even after the RBA’s recent rate cut official rates stand at 4.25%.  Strong growth has also allowed for a relatively healthy budget position; the market estimates the fiscal deficit could be a fairly modest 1.5% of GDP in 2012.  

The AUD and the Australian debt market are not without their risks, however.  First Australian runs a current account deficit which means that the AUD could be hostage to the whims of international savers.   Also, the AUD is overvalued in terms of PPP, it has not had a good year (being the third worst performing G-10 currency this year) and it is vulnerable to the risk that China could slow by more than the market is currently anticipating.  
 
Investors that are considering extending their exposure to the AUD in 2012 should also consider the CAD. Canada also has a relatively strong budget position and a stable banking sector.  While the CAD is the worst performing currency year to date yet where is differs from the AUD is in that it is undervalued on a PPP basis.   The relatively weak exchange rate is helping Canadian exporters diversify from the US, though the Canadian economy remains firmly tied to its larger regional neighbour.  Recent stronger than expected US data releases are good news for the Canadian economy and its CAD.

While Canada has suffered downward revisions to its growth outlook, it did post a better than expected Q3 GDP number which led to the BoC dropping a lot of its previously extremely dovish rhetoric.  The BoC, it seems, is unlikely to cut rates imminently. Although the BoC will not be tightening policy for a long time, a move is set to happen before the Fed.   After all, Canada has been far more successful in creating employment since 2008 compared to the US.  

Oil is a significant risk factor for CAD investors. The market is currently divided between calls that oil prices will decline in 2012 on the back of slowing world growth and by the alternative opinion that Mid-Eastern tension will drive prices higher.  It would be a brave call to expect the CAD to outperform the USD during a ‘risk off’ environment. 

However, the CAD is set to perform better than the EUR when market concerns over the Eurozone are at elevated levels, as they currently are. While we would continue to view rallies in EUR/CAD is selling opportunities for the time being ahead of support at the EUR/CAD1.3400 area,  AUD/CAD is also positioned to see further downside potential.  The 200 day sma at AUD/CAD1.0280 is set to offer strong support.

source: Rabobank