Buy Australia's Dollar Against Canada's, TD Securities Says

By Ron Harui

Sept. 1 (Bloomberg) -- Investors should buy Australia's dollar against Canada's on prospects that the interest-rate differential between the two nations will shrink less than traders expect, according to TD Securities.

Australia's dollar is the third-worst performer among the 16 most-active currencies versus Canada's dollar in the past month as investors raised bets the Reserve Bank of Australia will lower borrowing costs by more than the Bank of Canada in coming months. The yield advantage of two-year Australian government bonds over similar-maturity Canadian bonds decreased to 2.98 percentage points from 3 percentage points on Aug. 29.

``Possibly too much has been priced into the Australian interest-rate easing cycle and we could see some weakness in Canada, so interest rates may not narrow as much as people expect,'' said Joshua Williamson, a senior strategist at TD Securities in Sydney. ``If we do see the BOC cut and the RBA not cut as much as the market expects, that's going to have some significant re-pricing in terms of the cross-currencies.''

Australia's dollar traded at 0.9105 versus Canada's currency at 3:44 p.m. in Sydney from 0.9123 late in New York on Aug. 29. The currency, known as the Aussie, touched 0.8922 on Aug. 27, its lowest level since Feb. 14.

TD Securities recommended buying Australia's dollar at 0.9050 against Canada's dollar, with a target of 0.9350, and placing an automatic instruction to sell the Aussie at 0.8875 in case the bet goes the wrong way. The 0.9350 level would be the currency's strongest since Aug. 13.

Capital Spending

The Aussie may extend its 2 percent rally from the six- month low reached on Aug. 27 after a government report showed last week the nation's business investment rose more than twice as much as economists forecast in the second quarter as mining companies spent extra on machinery and equipment to meet demand from China.

Capital spending grew 5.7 percent from the previous three months, when it gained a revised 1 percent, the Bureau of Statistics said in Sydney on Aug. 28. The median estimate of 23 economists surveyed by Bloomberg News was for a 2 percent gain.

``The business sector is on fire with strong investment growth in the quarter and an extremely buoyant outlook for planned investment over the next year,'' Williamson and Stephen Koukoulas, London-based head of global foreign exchange and fixed income strategy, wrote in a client note dated today.

Benchmark interest rates are 7.25 percent in Australia and 3 percent in Canada, compared with 2 percent in the U.S. and 0.5 percent in Japan.

Traders expect the RBA will lower borrowing costs by 1.06 points over the next 12 months, while they forecast the Bank of Canada will cut its benchmark by half a point within the next year, according to Credit Suisse Group indexes based on interest-rate swaps. The RBA's next rate decision is tomorrow and the Bank of Canada's is on Sept. 3.

`Clearly Soggy'

Canada's dollar has fallen versus 11 of the 16 major currencies in the past month. The Bank of Canada reduced interest rates four times from December through April to 3 percent, to support a faltering economy.

The world's eighth-largest economy expanded less than economists forecast in the second quarter, a government report showed last week, when the currency dropped 0.6 percent versus Australia's dollar.

``The Canadian economy is clearly soggy and the market is looking for interest-rate cuts in the months ahead,'' Williamson wrote.

Gross domestic product, the sum of all Canadian-produced goods and services, grew at an annualized pace of 0.3 percent from April to June, after a revised 0.8 percent drop in the first quarter, Statistics Canada said on Aug. 29. Economists surveyed by Bloomberg News had forecast 0.6 percent growth.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net