Last updated: May 3rd, 2017 at 09:59 pm
The prices of key commodities have been falling since May. It is no coincidence that the Australian dollar and Canadian dollar have also been on a weakening path since around the same time. These two currencies are closely linked to the performance of metals such as gold and copper and also oil. The close correlation between the prices of the commodities and the currencies suggests that a turnaround in one will go hand in hand with a turnaround in the other. The commodities show little sign of an imminent improvement and this has implications for the direction of travel for the Aussie and Canadian dollars.
There is a reason why they are referred to as the “commodity currencies”. Just look at the impact they have on the respective economies. Over a quarter of Australian exports are metals such as gold, copper and iron ore, whereas Canada produces around 4 million barrels of oil per day and is in the top 5 producers in the world. It should come as little surprise therefore that the value of the Aussie dollar is closely correlated to the direction of the metals prices, whilst the Canadian dollar is closely tied to the price of WTI Oil.
For the Aussie dollar, in 2015, the gold price has been a very strong indicator, as the chart below shows. However, there is also a strong correlation with the price of copper too. The problem for the Aussie is that despite the rebound seen on the Aussie yesterday, there is little sign of a pick up in the commodity prices, which continue to trend lower. The gold price seems to be simply in consolidation mode and is still likely to break to the downside in due course (remember, the trend is your friend…) and copper recently broke to multi-year lows. With continued concerns over faltering growth in the Chinese economy, these trends show little sign of a reversal. It would appear that a sustainable strengthening of the Aussie dollar will be unlikely under these market conditions. It is possible that an unwinding technical rally could be seen on gold, however the old breakdown of $1131 would be the likely limit. On the Aussie, the key overhead equivalent resistance comes in c. $0.7530/$0.7600.
The correlation of the Canadian dollar to that of WTI is equally as strong. Aside from a couple of weeks in May, the charts have been very closely aligned (seeing as the pair with the US dollar is prices as USD/CAD the direction is the opposite to WTI). So when we see WTI in consistent decline, the Canadian dollar will remain under pressure. The last 6 weeks has been particularly well correlated. The price of WTI seems to be tracking back for a full retracement of the rebound from the March low at $42.03 which is around 9% below current price levels.
The average moves on the oil price have tended to be around 4 times the size of the moves on USD/CAD. If this is repeated in the coming days/weeks, if WTI falls back to $42 again then it could equate to a move of around 2% to 2.5% upside in USD/CAD. From current levels that would mean a move from c. 1.3200 towards 1.3460/1.3530. With USD/CAD into multi-year highs again and with little real resistance overhead, the way is largely clear.
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