Monday, July 18, 2011

Pair trading update

Sorry the posting have been light as I was Down Under with the family. Here is a vacation picture of visiting black swans in New Zealand:

Upon my return, I reviewed some of the pairs trades that I suggested in the past. It appears to be time to consider an exit from those two pairs. First of all, I had suggested that Canadian equities were a cheap way to get Aussie exposure, largely because the two economies are so similar. This pair has moved back into neutral territory and it's time to think about taking it off. There may be some more short-term upside in the pair as the Australian market is underperforming over anxiety over the government's carbon tax proposal.

As well, I had suggested that it was time to buy Research in Motion and short Nokia. Given that there are some profits in that pair and the risks inherent in that trade, it may be time to take some money off the table.

A new trade to consider
As I wandered the streets of Sydney, I came upon this sign (note the institution, but the rates are similar across all banks):

Notwithstanding that this is a commentary on the difference between the accommodative policy of the Federal Reserve and the more inflation aware RBA, the difference in yield is suggestive of a AUD vs. CAD carry trade. Given that the nature of the economies are similar, this would be an interesting fundamental currency pair to consider.

However, this may not be the time. The chart below of the AUDCAD rate shows that the currency pair has broken a key technical support:

However, this would be an interesting carry trade to consider in the future given the dynamics of the two economies.

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