Date: 25 Sep 2018

Japan’s Nomura Bank noted yesterday how AUDCAD had recently printed at levels not seen since 2016. The Australian dollar (AUDUSD, AUDJPY, EURAUD, GBPAUD) has had a tough time of it in 2018, with markets having rationally concluded that given Australia’s deep economic links to China, market caution about the trajectory of the Chinese economy as a consequence of the deterioration in China-US trade relations, could be expressed, as a proxy, through a short AUD position. But the speech of China’s Premier Li Keqiang at last week’s World Economic Forum in Tianjin suggested Beijing will opt for a greater degree of economic stimulus. That could prompt traders to re-evaluate the value of running short AUD at a time when, as Friday’s data from the US’ Commodity Futures Trading Commission (CFTC) for the week ending Sept 18, there remains a very sizeable extant structural short AUD position. The CFTC data showed a net short AUD position of some 68,000 contracts equating to a long greenback position of USD 4 billion. As regards the Canadian dollar (CADJPY, EURCAD, GBPCAD, USDCAD), while there remains uncertainty over the progress of trade talks between Ottawa and Washington, the CAD has held its own in recent months, possibly supported by a firmer oil price. But with US President Donald Trump now seeking to put more pressure on OPEC to increase oil production, some of that oil-derived CAD support could erode. Nomura Bank takes the view that the risk-reward ratio now favours taking a more constructive view on the trajectory of the Australian dollar versus the Canadian dollar. It remains to be seen whether the wider currency market will feel a long AUDCAD exposure makes sense.

by Neal Kimberley, External Currency Analyst