Wednesday, May 4, 2011

Cheap way to get Aussie exposure

I have written about the Australia/Canada pair trade before. Both economies and their stock markets are structurally similar. The major difference is that while Australian resource exposure is tilted towards mining, Canadian resource exposure is more heavily weighted in energy.

Buy Canada/Sell Australia
The chart below shows the relative performance of the iShare Canada ETF (EWC) compared to the iShare Australia ETF (EWA), both measured in USD. As you can see, Canada is near the bottom of a relative trading range.

The Canadian election held Monday gave the Conservatives a rare majority government. These results should take some of the political uncertainty out of the Canadian market.

Given the relative performance of the two markets, traders may want to consider going long Canada and shorting Australia. More risk averse investors can think of the Canadian market as a cheap way of gaining exposure to an Aussie-like stock market.

As always, pairs trading is not for the faint of heart and any trade should be entered with well-defined risk limits in mind.

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