Currency Corner: clash of the commodity currencies

In this week's currency corner, Dominic Frisby looks at the Australian dollar and the Canadian dollar – two currencies heavily geared to natural resources.

Canadian dollar © Getty Images

Today I'm going to pick another currency pair pretty much at random and see if there's a trade to be had.

The pair I'm going to go with is the Australian dollar (the Aussie) and the Canadian dollar (the loonie).

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

Without having looked at a chart, and knowing absolutely nothing about their relative performance, I thought this might be quite an interesting combination.

Both economies are heavily geared to natural resources; both economies enjoyed huge booms alongside the commodities bull market of the noughties; and both have struggled since 2012.

Advertisement - Article continues below

Let's start with a long-term chart. It's always important to do this, as it will establish the long-term parameters.

So here's 20 years of the Australian dollar against the Canadian dollar. This chart shows how many Canadian dollars there are to an Aussie. Currently, one Australian dollar will get you C$0.90.


When this chart is falling, the Aussie is getting weaker. When the chart is rising, the Aussie is strengthening and the loonie is weakening.

Straight away we can see a clear, long-term range. Roughly C$0.75 marks the lows in the Aussie and C$1.05 to C$1.07 marks the highs. Given this is 20 years of trading we are looking at here, in which fortunes have no doubt been won and lost, a C$0.30 range is pretty tight, I'd say.

That the lows for the Aussie came in 2001 which was the bottom of the market in natural resources, pretty much and 2008, when natural resources capitulated in the financial crisis. In other words, those lows in the Aussie came at the same time as major lows in commodities markets. That might be a useful indicator for those who follow natural resources.

It would appear the Australian dollar is even more geared to natural resources than the Canadian dollar, which is quite interesting.

Advertisement - Article continues below

The highs, meanwhile, came in 2004 and in early 2012, the latter also marking the peak in commodities markets generally.

This really is one for the trend-followers. You can see that since 2012, there has been a clear downtrend in place. The Aussie has been steadily weakening.

But sell-offs in 2013, 2015 and 2018 all found support around the C$0.91-C$0.93 area. That line of support was firmly broken in July however.

We zoom in now to a chart of the last two years. This is a weekly chart. Also drawn are the 21-week and nine-week exponential moving averages, which I use to define and follow trends. You can learn the system here.


I've marked the sell-signals in red and the buy signals in green. These occur when the moving averages cross.

The months around the turn of the year were not a good time for the system. As the market ranged between $0.91 and C$0.98 we got whipsawed.

Advertisement - Article continues below

But in April of this year, we got a clear sell around $0.95c and rode the market down. Since August however the Aussie has staged something of a rally. A few more weeks of rallying and that sell will turn to buy.

But, typically, old lines of support turn into lines of resistance. Remember that line of support at C$0.91? I've marked it with a dashed line here. But if you think of the support in 2013 and 2015, it is more of a resistance zone that extends to, say, $0.93c.

How far is this rally in the Aussie going to extend?

I think that a small wager that it gets into that C$0.91-C$0.93 zone and then stalls, before that downtrend resumes, is well worth a flutter, because you can limit your risk to a penny or two above the zone.

So there we go, the Australian dollar against the Canadian dollar. The Aussie is in a downtrend. It's staging a relief rally. The question is: is this a just a relief rally, or is it something more?




The currencies to bet on this year

The US dollar could be set to weaken this year, while the euro, Canadian dollar and the Swiss franc could be good bets for optimistic traders.
17 Jan 2020

Welcome to Currency Corner – your weekly guide to the world’s biggest market

Forex is by far and away the biggest market in the world, with an average daily trading volume of over $5trn per day. Here, Dominic Frisby looks at th…
3 May 2019

The nature of money

The best currencies are based on a strong democracy, strong institutions and a firm attachment to both the rule of law and the protection of private p…
28 Feb 2019
Pound vs Euro

Currency Corner: As Britain leaves the EU, what lies ahead for the pound?

On Brexit Day, there’s only one currency pair to look at, says Dominic Frisby – the pound and the euro. Will sterling continue to strengthen, or will …
31 Jan 2020

Most Popular

UK Economy

Britain has a new chancellor – get ready for a major spending splurge

The departure of Sajid Javid as chancellor and the appointment of Rishi Sunak marks a change in the style of our politics. John Stepek explains what's…
14 Feb 2020

Money Minute Friday 14 February: The latest from RBS, Britain's state-owned bank

Today's Money Minute previews results from RBS – Britain’s state-owned bank – and from pharma giant AstraZeneca.
14 Feb 2020

Living on a houseboat: the pros and cons of a floating home

Living on a houseboat sounds romantic and peaceful. But it’s not as straightforward as it looks, says Nicole Garcia Merida
14 Feb 2020

Is 2020 the year for European small-cap stocks?

SPONSORED CONTENT - Ollie Beckett, manager of the TR European Growth Trust, on why he believes European small-cap stocks are performing well.
12 Feb 2019