Antipodean Clash AUD vs CAD

They’re known as the darling currencies of the commodity world. The Aussie & the loonie. one has fallen for the 4th straight month against the other after having attained 15-year highs in February. Why and what next?

The Aussie and loonie both soared against the USD and JPY before the Great Financial Crisis, tumbled together during the great deleveraging of 2007-2008, then both riding the commodity rally of 2010-2012.

The Australian dollar is known as the “iron ore currency” thanks to Australia’s position as world’s 2nd largest copper exporter. Aussie is also exposed to wheat, making the Aussie dependent upon the climactic phenomenon affecting the grain. More importantly, Australia’s dependence on China is underlined by the fact that 25% and 10% of its total merchandise and services exports are sold to the world’s most populous nation. Australia is also the fourth largest destination for China’s exports, behind the US, Hong Kong and Japan.

The Canadian dollar, loonie, is widely dependent on oil and gas, with 90% of its exports destined to the US. The low-debt usage by Canada’s consumers gave the nation’s banks the highest bill of health over the past 4 years, immunizing the banks and housing market from the global housing crisis. The Bank of Canada is the only G10 central bank not to have eased interest rates in the latest global easing cycle of 2011-2012.

Today, the AUD/CAD cross is down 6% from February’s 15-year highs as the Reserve Bank of Australia continues its easing monetary policy, while the Bank of Canada readies to increase its rates later this year. Overnight, the RBA made a bigger than expected 25-bp cut in its overnight rate, slashing it by 50-bps to 3.75%, the lowest since February 2010.

After today’s RBA move, markets anticipate the central bank to ease twice later this year, taking the overnight rate to 3.25%. In contrast, the Bank of Canada is signaling a rate hike to 1.25% later this year. Such inverse expectations may take the AUDCAD further down. AUD/CAD, however, has yet to break below the all-important parity level, a support point holding since October. Rather than anticipating a break below parity, traders may consider a decline from the current 1.0180 to a 1.0100, which is right above the 100-week MA.

AUD/USD is another option for going against the Aussie should global equities fail to regain their April highs and a descent into another wave of risk-aversion. Struggling to hold above its 55-WMA, AUD/USD is increasingly finding pressure at 1.0500, with the 1.02-1.05 range proving a more familiar band for traders. In the event that the Federal Reserve moves to the hawkish camp and China’s figures move from neutral to weak, AUD/USD could finally break below the 1.01 foundation, coinciding with the 100-week moving average. Stay tune for this battles, involving the antipodeans.