“He who establishes his argument by noise and command shows that his reason is weak.”
–Michel de Montaigne
Commentary & Analysis
Will Aussie follow Cad’s path – down against the dollar? I don’t know, but willing to
My editor’s note is this: I realize correlation isn’t causation. I realize correlations can change at any moment because every moment in the market is unique. I realize it isn’t always easy to determine which variable leads and which follows in a seeming correlation; it may be neither as both may be driven by some other narrative/variable/rationale, etc. But sometimes divergences in prior correlations which have stood for a while can represent nice setups for a winning trade.
A divergence setup between CAD and Aussie may be in play.
As I have shared recently, the Canadian dollar is following oil prices lower (and we are expecting a fall in WTI to the mid-30’s). In addition, the 2-year spread comparing Canada to the United States is pushing lower and lower against CAD. Given the expected actions of the US Fed, the 2-year spread seems poised to further deteriorate against CAD. You can see this in the weekly chart of CAD/USD below (oil black and CAD-$ blue):
On the next page, we have overlaid CAD/USD (red line) on our Australian dollar weekly Wave chart; and have included the 2-yr yield spread AU-US in the bottom pane:
Note the relative weakness in CAD versus Aussie as compared to the US dollar. That is a divergence. It’s the same story on the yield spread; Aussie’s once dominate 2-year spread over the US has fallen from a high of around 4.6% when the Aussie peaked (1.1089) back on
8/12/2011 to 0.41 today. If the Fed meets current expectations, this spread will likely go
negative in 2017.
I say the same story because it seems the US Fed will be moving sooner than the Reserve Bank of Australia. And maybe today’s Chinese PMI news adds more validity to that expectation…
China’s April Purchasing Managers Index (PMI) was weaker than expected in April…
- if you compare the China PMI chart below to the AUD/USD weekly chart above, I think you will see a positive correlation there too
We used this type of analysis to position for a decline in the Canadian dollar, establishing a put position in our Currency Options Strategist service back on April 12th. So far so good. Our subscribers have pulled off half postiion gains on those puts for a133% profit and are still sitting on a ½ position now showing open gains of 167%. And yes. Our subscribers have added Australian dollar puts, just yesterday, hoping Aussie follows the path blazed by CAD lower.