Goldman Sachs advises caution in pursuing commodity currencies like the AUD, NZD, and CAD, even with potential dollar weakness. These currencies have reached or nearly reached their 3-month targets before easing against the dollar.
The AUD, NZD, and CAD show a lag compared to higher-carry EM currencies, displaying unusual relative weakness. Goldman Sachs suggests that this isn’t merely due to risk sentiment, but instead relates to domestic policy shifts.
Domestic Policy Shifts
In Australia, New Zealand, and Canada, terminal rate pricing is falling, and weaker domestic backdrops are noted. These factors necessitate caution regarding the aforementioned commodity currencies.
While the downside for the dollar could be prompted by Fed easing, policy uncertainty, and global flows, better options might be found in the EUR and JPY. Goldman Sachs maintains a cautious stance on the AUD, NZD, and CAD, though USD weakness may still provide potential upside.
We are seeing signs that the US dollar may weaken, but chasing commodity currencies like the Australian, New Zealand, and Canadian dollars is not the recommended play. These currencies have already run up to their recent targets and are now showing signs of pulling back. This hesitation is a clear signal for caution in the coming weeks.
A notable observation is that these commodity currencies are lagging behind other risk-on currencies, particularly those in emerging markets offering higher yields. This relative weakness is unusual and suggests something more specific is at play than just general market sentiment. For example, Australia’s latest quarterly CPI print for Q2 2025 came in softer than expected at 3.1%, adding to the view that the Reserve Bank of Australia is done hiking rates.
Weakening Domestic Outlooks
The core issue seems to be weakening domestic outlooks and a shift in interest rate expectations for Australia, New Zealand, and Canada. The most recent Global Dairy Trade auction on August 19, 2025, saw prices fall another 4.3%, directly pressuring the Kiwi dollar. Similarly, Canada’s July 2025 jobs report showed a surprise contraction, raising concerns about its economic resilience compared to the US.
For derivative traders, this setup suggests that buying simple call options on AUD/USD or CAD/USD may not be effective, as domestic weakness could cap any rally. It may be more prudent to consider strategies that benefit from this capped upside, such as selling out-of-the-money call spreads. This allows traders to collect premium while betting that these currencies will underperform.
To take advantage of potential dollar weakness driven by Federal Reserve easing expectations, we see better opportunities in the euro and the Japanese yen. The Eurozone’s flash PMI data for August 2025 beat expectations, suggesting economic activity is stabilizing. This gives the euro a stronger fundamental footing compared to the commodity currencies right now.
This divergence also creates opportunities in cross-currency pairs, which can isolate the weakness in the commodity bloc. We are looking at strategies like going long EUR/AUD or long JPY/CAD to play this theme directly. These positions could perform well even if the broad US dollar trend becomes choppy.
