The Australian dollar (AUD) and the Canadian dollar (CAD) have a lot in common.
They are both backed by economies that are reliant on commodity exports. For
investors looking to hedge or speculate on commodities via foreign exchange,
they both provide ample liquidity as the world's sixth and seventh most traded
The performance of both currencies depends on their
respective major trading partner. CAD is affected by the U.S. economy as U.S.
buys 75 percent of Canada's exports. In a similar fashion, AUD is affected by
China's economy as Australia's biggest export destination is China, buying more
than 20 percent of its exports.
Higher commodity prices in 2009 helped
AUD soar 29 percent last year against the USD, its biggest annual gain in six
years. CAD was no slacker, rising close to 16 percent in 2009. Apart from higher
commodity prices, AUD's stronger rise can be attributed to the booming China.
For 2010, the AUD is perceived to trump CAD again as Australia's exposure to
China will beat Canada's exposure to U.S., its main export
Economic releases from China have clearly affected movements in
AUD. For example, AUDUSD fell 1.4 percent last Friday after the Chinese central
bank's announcement to tighten banks' reserve requirements by 50 bps effective
February 25, surprising markets and prompting investors to shed riskier assets.
It is the second hike by China this year and few had expected more tightening
after recent data showing moderating inflation. However, the hike is
specifically aimed to curb loan growth, which has soared and raised fears of
overheating asset prices.
China is still expected to grow 8.5 percent
this year. Having helped Australia avoid recession in last year's global
downturn, China will again help Australia to grow its economy to its potential
long-term growth rate of 3.5 percent in 2010. Apart from the influence from
China, Australia itself has a sturdy economy and the highest interest rates
among the developed countries. AUD is responding positively to an improving
Australian economy. Last week, AUD bolted higher following news that Australian
employment surged 52.7K in January and the unemployment rate eased to 5.3
Canada is forecast by its own central bank to grow at 2.9
percent in 2010. However, 2009 proved that CAD did not need strong Canadian
growth to help it appreciate. Indeed, CAD rallied as the Canadian economy turned
south. The U.S. economy has a bigger influence on CAD. In contrast to China, the
U.S. is expected to grow at only around 3 percent this year. Despite the fact
that CAD is a strong currency on its own with surpluses in fiscal and trade
balances, it has become hostage to the U.S. economy.
USD/CAD is also
tightly correlated with the oil prices and global equities. Oil and equities
have been under pressure lately because of an increase in risk aversion, caused
by concerns about euro zone sovereign debt. This trend has caused the CAD to
pull back after kicking off the new year on a strong note, testing the 2009
high. This pattern will stay for the remaining of 2009. Although CAD will hold
up reasonably well as the demand for oil rebounds with the recovery of emerging
markets, it will unlikely sustain gains beyond last year's highs.
currencies have other differences. Commodities — including iron ore, coal and
copper — make up 85 percent of Australia's exports. Oil and gold are Canada's
top exports. But about 40 percent of Canada's exports are manufactured goods,
whose prices are under pressure and demand for them will remain weak.
Australia's top commodity export, iron ore, is expected to rise strongly, up to
40 percent this year based on demand from China.
The Australian economy's
resilience during the downturn has prompted the Reserve Bank of Australia to
raise its rate three times since October to 3.75 percent from 3.00 percent.
Markets expect Australian rates will rise to 4.5 percent by the end of 2010. In
contrast, Canada rates are expected to remain at the current 0.25 percent for
some time, and perhaps a hike to 0.5 percent towards year end.
yield advantage and better economic fundamentals, the AUD has gained over 20
percent to CAD 0.94 from a 2009 low of CAD 0.78. If China can achieve its
expected growth rate of 8.5 percent in 2010 and commodity prices remain strong,
AUD could carry further gains over CAD.
The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.
Foreign exchange transactions can be highly risky, and losses may occur in short periods of time if there is an adverse movement of exchange rates. Exchange rates can be highly volatile and are impacted by numerous economic, political and social factors, as well as supply and demand and governmental intervention, control and adjustments. Investments in financial instruments carry significant risk, including the possible loss of the principal amount invested. Before entering any foreign exchange transaction, you should obtain advice from your own tax, financial, legal and other advisors, and only make investment decisions on the basis of your own objectives, experience and resources.