Australian and Canadian Dollars Forecast to Fall Against British Pound and US Dollar

"We recommend an equally-weighted basket of short AUD, CAD & NOK vs long USD & GBP" - Steven Saywell at BNP Paribas

The Australian and Canadian dollars are forecast to experience further downside pressure over coming months as their central banks are forced into further interest rate cuts and the pound sterling stands to advance.

The unexpected easing by the Norges Bank last week is a likely harbinger of further monetary policy easing in the commodity bloc argue analysts at French investment banking giant BNP Paribas.

"The economic slowdown in China is the key driver of this change. This trend would weaken the NOK, AUD and CAD in particular. An interesting trade idea is to be short a basket of the AUD, CAD and NOK vs the USD and GBP," says BNP analyst Steven Saywell in London.

While BNP Paribas are in the bearish Australian dollar camp it is worth noting that there are other viewpoints out there.

We reported this week that TD Securities are considering raising their interest rate forecasts on the AUD while Lloyds Bank suggest the New Zealand dollar could be at the bottom of its recent downtrend.

We see the argument boiling down to what kind of economic growth China will deliver over coming months, a particularly hard factor to input into currency valuations.

China’s slowdown affects commodity demand, notably oil but also iron ore, aluminium and copper.

"The sharp decline in oil prices (we now forecast only a modest 10-15% recovery by the year end) has weighed heavily and will continue to affect the Norwegian and Canadian economies," note BNP Paribas.

The AUD is also vulnerable at current levels if the Chinese slowdown continues.

"Our base case is for no further easing from the Reserve Bank of Australia, but markets may speculate on further cuts if Chinese demand for commodities contracts further. Our BNP Paribas CLEER™ model forecasts that AUDUSD should decline towards 0.67 by the year end," says Saywell.

ANZ: Expect More Australian Interest Rate Cuts

Also seeing the significance of the Norges bank cut is ANZ chief economist Warren Hogan, who in the past week revised his forecast to factor in two further RBA rate cuts.

This will take Australia's cash rate to 1.5 per cent by May 2016.

Hogan says the same problems are being faced by all commodity-reliant economies, of which Canada and Australia are perhaps the largest.

Longer-term Bullish on the Pound Sterling

While BNP Paribas maintain a downside bias on the Australian dollar the opposite is true for the British pound.

"We remain bullish on the GBP and think market pricing for BOE hikes is likely to increase in the weeks and months ahead. In the statement accompanying Thursday’s policy decision, any indication that more members are moving towards voting for hikes or an additional ‘yes’ vote would be supportive of the GBP," says Saywell.

Markets maintain close to neutral exposure on the USD and GBP.

USD exposure at +11 is one of the lowest this year while investors now hold a small net short GBP exposure at -1.

"There is considerable scope for positioning to build in favour of our recommended basket," says Saywell.

An interesting point made by BNP Paribas is that an added advantage of their recommendation is that if the US and UK delay monetary policy tightening because of a deteriorating international environment, pressure will mount on policymakers in the commodity bloc to ease further.

Normally this would be seen as a negative GBP scenario - but the logic behind the delays prompting aggressive action at the Canadian and Australian central banks appears a valid one.