EUR diversification

Since the start of last month the EUR has underperformed all other G-10 currencies (with the slight exception of the DKK).  Along with the usual safe haven suspects (the JPY and the USD) it is the NZD, the AUD and the CAD which have been the best performers.  

The ability of these ‘commodities currencies’ to behave as diversification trade is despite the usual tendency of these currencies to behave poorly in a ‘risk off’ environment.  However, investors cannot be blamed for wanting to diversify their long USD and JPY positions. 

After all Japan and the US are the two most heavily indebted nations in the world so it is ironic that investors are being forced into JGBs and treasuries to escape the debt crisis in Europe.  Fiscal positions in Canada and Australia are far better than in most other G10 nations. 

While the AUD also benefits from a decent carry, the economic outlook in Canada suggests that the spread between Canadian and US short-term rates will move more in favour of the CAD perhaps towards the end of this year in view of Canada’s better growth and employment position.    

We continue to favour buying EUR/CAD on rallies and look for a move towards the Jan 11 low in the EUR/CAD1.2760 area.  
 

source: Rabobank