Swiss bank UBS AG says that it likes the Canadian dollar, along with a trio of its fellow commodity currencies, over the traditional major currencies, the U.S. dollar, the euro, the British pound, and the yen, which face debilitating debt burdens.

In a research note published Tuesday, UBS says that it believes that the loonie, the Australian dollar, the New Zealand dollar and Norway’s krone, will benefit from the troubles facing the big four currencies.

“Vast and growing foreign-held debt hobbles the U.S.; Japan, too, struggles under a mountain of debt; the UK has to pay for its huge banking system rescue; and Europe’s sovereign debt crisis is deeply fragile,” it says. “All four economies need massive tax revenues to cover the costs of their individual crises, which will heavily burden future growth and limit their currencies’ value relative to those of minor countries.”

As a result, it says that it makes sense for long-term investors to reduce their exposure to those four currencies in favour of currencies from commodity producers. “The economies of commodity-producing countries should continue to benefit from the global recovery, which is likely to increase demand for commodities,” it says. And it expects the central banks in Canada, Australia, New Zealand and Norway to continue tightening their monetary policies.

“Moreover, we believe that revived risk sentiment is likely to support these risk-sensitive currencies,” it says. And, it notes that several central banks could decide to add currencies of commodity-producing economies to their currency reserves for diversification.

In particular for Canada, UBS says that it expects Canadian economic data to continue to surprise to the upside, and, it sees “a high likelihood” that the next rate hike from the Bank of Canada could be on July 20.

“The BoC’s more aggressive monetary policy, compared with the Fed’s, should further increase the interest rate differential between Canada and the U.S.,” it says, adding, “We believe USDCAD could approach an all-time low of 0.9059 within the next two years.”

IE