Marius Paun | London, UK | Senior dealer | Wednesday, 28th August 2019
The Canadian dollar is the fifth most widely held reserve currency behind the US dollar, the yen, the euro and the British sterling. At the same time, Canada is the tenth largest economy in the world with a gross domestic product of $1.8 trillion. Being a relatively safe country with a stable legal system and matured political class, its currency accounts for about 2% of global foreign exchange reserves.
Also known as the loonie (named after the bird which appears on the one dollar bill), the Canadian dollar is part of the so called ‘commodity currencies’. In the same group is the Australian dollar, the Norwegian krone and to a lesser extent, in terms of demand, the Chilean peso. The reason for that is the bulk of Canadian economy is linked to the production of commodities like oils and gas, mining metals or agriculture.
Consequently, the Canadian dollar tends to rise when the commodity markets are rising and decline when they are weakening. The commodities super-cycle which started around the turn of the millennium is testimony to that. For example, when oil prices went to a low-double-digits ($10-$12 a barrel) gold was below $300 per troy ounce and grains were also very cheap, the Canadian dollar moved below $0.65.
But conversely when crude oil prices made a record high of $147 a barrel in 2007, the loonie went briefly above parity to the US dollar to a high of $1.10. No later than 2010, the Canadian dollar was still valued at $1.05. Since then the trend has been steadily downwards and today the loonie is worth around $0.75.
As central bankers around the world are now on track for further monetary easing, so the Bank of Canada is expected to follow in the footsteps of the US Federal Reserve’ latest cut. However, the latest inflation figures in Canada surprised on the upside, coming in at +0.5% month on months versus expectations of a rise of just 0.1%. On top of that, last Friday core retail sales data showed an increase of 0.9% against consensus for a decline of 0.1% month on month.
The growing US – China trade disputes are likely to weigh on the global economy outlook which in turn might keep demand for fossil fuels largely subdued. And that does not bode well for the commodity currencies at least on the short term. However foreign exchange is a relative game. Could it come down who cuts the interest rates faster and stronger? It remains to be seen.
The USDCAD pair has reached a recent high of 1.4688 at the beginning of 2016 as the chart shows (which corresponds to the low in the Canadian dollar) and a low of 1.2060 on September 2017 (high in $ CAD).
Bearish scenario (for the Canadian dollar)
We need to see the USDCAD going higher. The chart shows the recent trend to be sideways for the past 15 moths ranging between 1.2770 and 1.3670. The next resistance can be seen at 1.3350 followed by 1.3440 and 1.3530. Encouraging for that, the price is now above the 9 and 21 week moving averages. But ultimately a move above 1.3670 will confirm the re establishment of the uptrend.
Bullish scenario (for the Canadian dollar)
However, the 9 week moving averages crossed below the 21 week moving averages in the second half of June this year thus giving the sell signal for the USDCAD. If that was to happen, the next support will be just above 1.32 followed by 1.3050.
Marius Paun | London, UK | Senior dealer | Friday, 16th August 2019
Australia is the world’s 13th largest economy, valued at around A$ 1.9 trillion (or equivalent of $1.3 trillion). However the country’s currency, the Australian dollar, is punching above its weight being the fifth most traded behind the US dollar, the euro, the Japanese yen and the British pound sterling. At the same time the Aussie dollar is the sixth most widely held currency, accounting for just shy of 2% of global foreign exchange reserves.
There are a few reasons why the Aussie dollar is in high demand relative to the size of its economy:
- Strong rule of law, relatively stable political arena enjoying, by and large, a free exchange rate mechanism
- In comparison to the US, the EU and Japan it had quite high interest rates especially during the last decade. It was the only developed economy which did not struggle during the recession of 10-12 years ago. As an example, interest rates in Australia were at around 5% in the aftermath, when in Europe and the US they were pretty much zero. Consequently, it benefited from extra demand brought on by the so-called carry trade – borrowing in low yielding currencies to buy into high yielding ones and pocket the difference (assuming relative stable exchange rate between the two categories)
- Another solid support was brought on by its high correlation to commodity prices and exposure to the fast-growing Asian economies. Australia is a major producer and exporter of iron ore, copper, coal, gold, silver and uranium all in high demand at the turn of the century
Nonetheless, being linked to these commodities was also its weakest spot as that asset class is notoriously cyclical. After reaching a top in 2011 (see gold high of over $1900) commodities have been on a downtrend since, taking the Aussie dollar south with them. Interest rates have also been dropped in June and July 2019 and now reached a record low of 1%. Back then the AUDUSD was trading around 1.10 whereas now is just below 0.68. In addition, Australia is facing a bursting bubble in the property market coupled with sluggish household consumption. Talking about a downward spiral.
Recently, in line with the majority of central bankers around the world (soon to be all of them probably), the Reserve Bank of Australia has been looking to ease the monetary policy. So much so that the minutes of the last meeting on August 6th showed the RBA board discussing unconventional monetary policies including negative interest rates to spur growth and achieve its 2% to 3% inflation target. Markets are pricing in another rate cut to 0.75% by the end of the year and another one to 0.5% by February 2020.
The minutes showed ‘that a package of measures tended to be more effective than measures implemented in isolation’ according to board members and the US-China trade dispute increased the risk to global economic growth as business had already significantly cut back investment plans.
The AUDUSD has reached a top of 1.1080 in July 2011 which pretty much coincides with the peak of commodities cycle. Since then it has been in a secular bearish trend. A string of lower lows and lower highs clearly point to that with the market price now below the 9 and 21-week moving averages.
The downtrend was signalled initially by the 9-week moving averages (red line) crossing below the 21-week moving averages (blue line) seen in May 2013. However, since early 2015 until recently, we can see the AUDUSD trading sideways largely between 0.67 and 0.81.
But the downtrend resumed earlier this month with a drop below 0.67 to a low of 0.6676. An early signal was represented by 9-week moving averages again dropping below the 21-week moving averages and until that changes, ‘the trend is our friend’. Still, the bears will want confirmation and if this month brings a close below 0.67 they will be looking to run positions to next support around 0.6250 followed by the low of 0.6008 seen in October 2008.
If the downtrend is not confirmed and proves to be just a false breakout, the bulls will be looking for a rally back to 0.72 which is also a 23.6% Fibonacci retracement. Further resistance can be seen just above 0.73 as well as around 0.75 level.
This scenario will mean either a fortune reversal for the Aussie dollar (sudden healing of the housing issue and/or the slump in consumption) or the US dollar eventually weakens cheering President Trump. Although either scenario is possible, it looks to be a big ask in the short term unless the Fed starts to cut rates aggressively.