Citi's FX strategists are bullish on these two commodity pairs

In two separate notes released Thursday, Citi Research strategist highlighted two commodity currencies that could offer upside opportunities for FX investors.

The first currency out of the two is the Australian dollar (AUD), which Citi strategists led by Osamu Takashima believe “looks undervalued.”

Given the weaker-than-expected Consumer Price Index (CPI) for the fourth quarter of 2023, Citi predicts that the Reserve Bank of Australia (RBA) will maintain its current policy stance in the upcoming board meeting.

Despite this, due to ongoing inflation concerns, it's improbable that the central bank will shift towards a more dovish policy direction anytime soon, they noted.

“The AUD looks undervalued relative to the USD, and there has been a build-up of long USD positions, particularly among leveraged investors.”

“Also, China pessimism will likely abate, so we believe the AUD will be bottoming over the medium term in the recent risk-on environment. The bar will not be high for a return to the 0.67–0.68 zone,” the strategists added.

The second commodity currency Citi is bullish on is the Canadian dollar against the greenback. Citi is bearish on USDCAD for several reasons, including the “largely priced” hawkish Federal Reserve.

Moreover, the strategists noted potential signs that economic performance between the U.S. and Canada might start to diverge and voiced a positive outlook on oil prices, which usually bodes well for CAD. Lastly, both the technical analysis and positioning setup could also bolster the Canadian dollar.

“The main risk is stronger-than-expected US data reignites inflation concerns and/or pushes out Fed cuts,” strategists led by Daniel Tobon warned.

By Vahid Karaahmetovic

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