Monday, June 10, 2013

Mystery chart leads to FX mystery

Further to my post Friday night (Would you short this?) From reading the comments, I can see that a lot of my readers got it. The chart is the AUDCAD currency cross. While this currency pair shows the Australian Dollar to be vulnerable to its Canadian cousin, the loonie, it brings up another mystery.

First of all, the pair may not be as technically vulnerable as it initially appeared because it hit a 50% retracement level on Friday despite breaking down from major multi-year support.

I understand how the hedge fund community seems to have piled into the AUDUSD short as the Aussie Dollar has gone into freefall for the last few weeks. The short position has been highly profitable in a very short time.

Here's the head scratcher. Why isn't its Canadian cousin similarly weak against the USD? The structure of the Australian and Canadian economies are very similar as they are both resource based and both about the same size.

Admittedly, Canada did see some surprisingly positive economic releases last Thursday (Ivey PMI) and Friday (employment). On the other hand, how long will it be before all the Aussie shorts pile into a loonie short position as an alternative, especially when the CADUSD remains in a long-term downtrend and it hit a Fibonacci retracement level Friday and backed off? For reference, see these bearish posts on the Canadian Dollar from Sober Look (Canada's latest job report is a mixed blessing) and FT Alphaville (Canada’s grizzly outlook).

Just asking.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

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Anonymous said...

Answer is shale gas. And America as the big export destination.

Anonymous said...

Maybe the AUD shorts are looking at the met coal price, which is getting crushed. In my opinion we would have to see weakness in the oil price before we see any weakness in the CAD dollar. Decision time is coming, there is a big triangle forming on oil since 2008.

Cam Hui, CFA said...

Sorry, shale gas isn't the answer. There isn't significant shale gas production in Canada compared to the US.

In fact, there is a discount to Canadian oil (and not just oil sands heavy oil) in the US because Canadian oil doesn't have sufficient export markets other than the US. The American destinations of Canadian oil has too much refining capacity, which accounts for a Canadian oil discount to WTI.

Anonymous said...

I think the simple answer as to why CAD is stronger than AUD relative to USD is that AUD has been a huge beneficiary of the carry trade and this has been unwinding ever since the Aussie central bank switched to being dovish earlier this year. It's also a possible sign that demand from China for Australian raw materials is declining as Australia is heavily dependent on its mining industry.

Anonymous said...

Also let's not forget the mammoth jobs report out of Canada last week. 90,000 is equivalent to a print of over 800,000 US Non Farms Payrolls. Definitely a factor for CAD strength recently!!