CAD and AUD are in the same Boat

The CAD dollar is now trading on the back foot for the first time in three days. The reasons are multiple, justifiable and easily identifiable. Europe, commodities and risk adjustment. The political readjusting in Europe over the weekend, albeit good and warranted, does not change anything in the short to medium term. Ballooning periphery yields and a lack of an ECB presence had the market unwinding some of the riskier trades that were entered into before the Rome meetings. Now we are back trading a defined and contained trading range, dictated by sovereign interest on top and corporate bids below.

Currently, with commodity prices under pressure and the EUR for sale on rallies has the currency looking vulnerable right hand side with the dollar edging towards those sovereign CAD bids as the EURO sovereign crisis enters a questionable and threatening new period for policy makers. A breach of the recent dollar highs should create some room for the dollar to move, despite the loonie outperforming the other risk and growth sensitive currencies (CAD vs. AUD +1.7% this month).

The currency has little “other” data to contend with ahead of the CPI release this Friday. The market does not expect any surprises that could provide the BoC with any concerns regarding their present policy path. Last week’s weekly flow data showed that the loonie demand had retreated, an indication that the currency valuation may be a tad rich for interested parties at these particular levels. Volatility (price swings) in the currency out right was little changed last week, one week after reaching the lowest level in more than a month (-6bp to +12.84%). The loonie has dropped -4.6% this year and is the worst performer among the G10. The greenback is down -2.5% (1.0175)

The Aussie dollar is not immune from Italy. Similar to other risk sensitive currencies, the AUD has dropped in sympathy with the EUR. Its largest trading partner, China, can do very little to protect growth and risk sensitive currencies in this environment. Especially in a market that is concerned with Italy following Greece, Portugal and Ireland down that slippery slope to first-aid.

The sharp rally in risk and equities has been partially unwound in this dull trading day. A day that has been focusing on Europe, especially ballooning Italian yields and the lack of an ECB presence during their 5-year auction. There is nothing to “hang ones hat on” for Aussie, except its not the EUR and its yields are more than zero.

The RBA minutes and Governor Stevens may ultimately be responsible for the currency direction this week as markets speculate about an “ease or no ease”. Commercial bids and a market appetite for gold on dips have slowed down the selling of the currency, despite the daily’s remaining bearish. In this current environment, the market remains a better seller of the currency on relief rallies, expecting to see parity sooner rather than later (1.0200).

Other links:
EURO Short sell as Italian Yield Climb

Aussie

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