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May 13 - 07:24 PM

G10: Here Is The Trade With The Greatest Correction Potential From A Valuation Perspective? - Danske

By eFXdata  —  May 13 - 10:15 AM

Danske Research flags long AUD/USD as a key recovery trade with a scope for upside correction from a valuation perspective. 

"Spot FX rates have moved quite a bit since January: the cyclical currencies sold off in wake of COVID-19 with NOK down some 10% vs EUR; NZD, CAD, AUD down 5-7% vs USD; JPY, USD, CHF generally stronger vs EUR.

Overall, according to MEVA, notably GBP/USD and AUD/USD (despite a drift lower in estimate for the latter) should, in the absence of new shocks, over time have the potential to correct higher, both close to 25% undervalued at current spot levels. Essentially, the same picture - if less extreme - is seen for EUR, CAD, and the Scandies vs USD, overall leaving the picture of an overvalued greenback. But, as history suggests, such fundamental disequilibria can be sustained for extended periods of time in the absence of actual triggers for correction," Danske notes.

"While we find it difficult to get bullish on the undervalued GBP with Brexit trade talks coming up, long AUD/USD in our view remains a key recovery trade: its China/cyclical/commodity features coupled with a strong valuation argument makes it an attractive global reflationtrade candidate. While inflation differences across countries may emerge in the aftermath of COVID-19 and also have the potential to shift real exchange rates over time, the mediumterm risk of a broad-based global reflation trend is well hedged with long AUD/USD," Danske adds. 

Source:
Danske Research/Market Commentary

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