Currency Corner: clash of the commodity currencies

published 26 November 2019

Outback Town That Rivaled Manhattans Prices Now Gathers Dust — Most of Australia's exports go to Asia

I thought it would be interesting in Currency Corner this week to compare the Australian and Canadian dollars.

There are many parallels between the two nations: both countries are extremely large and cities aside sparsely populated; their demographics are similar; politically, they are both perceived as stable social democracies with a respected rule of law; and economically, both are large exporters, extremely geared to natural resources.

Canada is the larger economy of the two: a population of about 36 million, which exported some $450bn of goods and services in 2018 ($12,600 per resident). It is also the more industrial of the two: its main exports in 2018 were mineral fuels, especially oil (22%); vehicles (13%); machinery and computers (13%); gems and precious metals (4%) and wood (3%).

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Australia's population is 23.5 million and it exported $254bn of goods in 2018 ($10,800 per resident). Of the two, it is more geared to natural resources: its main exports in 2018 were mineral fuels (35%); ores, slag, ash (24%); gems and precious metals (6%); meat (4%) and inorganic chemicals (3%).

But perhaps the big difference between the two is their trading partners. More than three quarters of Canadian exports by value went to its North American fellows, the United States and Mexico. Just 12% went to Asia.

About half of Australia's exports went to China, Japan, India or South Korea. China alone accounted for 30%. The US, meanwhile, accounts for just 3.6%.

Asia China, especially matters to Australia. North America the US in particular matters more to Canada.

What the Aussie and the Loonie can tell us about China vs the US

Currently you'll get C$0.90 for an Aussie dollar. Over the past 20 years the two have traded in by forex standards a fairly tight range. Peak strength in the Canadian dollar (or "loonie") came in 2001 and late 2008, when around C$0.75 would fetch you an Aussie dollar. Peak Aussie strength came in 2012 at around C$1.07.

This last decade the Aussie has rivalled even sterling in its weakness. Even with the weak Canadian dollar, it has been in a multi-year downtrend against the loonie.

Here we see the last three years in close-up, along with the 21- and six-week exponential moving averages. We can see the Aussie is in a clear downtrend, which has perhaps stabilised a little over the last three months.

It is entirely conceivable that the market could be slowly bottoming out. But there have been plenty of previous false dawns in the Aussie dollar and my instinct says this is yet another.

I don't think the world is ready for a huge boom in natural resources. C$0.91 or C$0.92, if you can get it, might be a place to be shorting again.

But given the similarities between the two nations and their economies, despite the different trading partners, the narrow trading range between the two currencies is not the most thrilling forex trade out there. You won't be too badly punished if you call it wrong but nor will you be laughing it up on Forex Millionaires' Row if you call it right.

Something like yen-euro offers a wilder ride, perhaps. But each to their own.

What I do find interesting is what this pair says about the relative state of Asia and North America. North America has been the better of the two. But a rallying Aussie dollar would suggest it is time to shift focus to Asia.

If Asians are buying Aussie raw materials it means Asian economies are spending and investing. That has implications.

This pair is one to watch.

Dominic Frisby's new bookDaylight Robbery How Tax Shaped The Past And Will Change The Futureis available at Amazon and all good bookstores with the audiobook, read by Dominic, onAudibleand elsewhere. If you want a signed copy and what could make a nicer Christmas pressie? you can order one here.

Dominic Frisby (“mercurially witty” – the Spectator) is the world’s only financial writer and comedian. He is MoneyWeek’s main commentator on gold, commodities, currencies and cryptocurrencies. He is the author of the books Bitcoin: the Future of Money? and Life After The State. He also co-wrote the documentary Four Horsemen, and presents the chat show, Stuff That Interests Me.

His show 2016 Let’s Talk About Tax was a huge hit at the Edinburgh Festival and Penguin Random House have since commissioned him to write a book on the subject – Daylight Robbery – the past, present and future of tax will be published later this year. His 2018 Edinburgh Festival show, Dominic Frisby's Financial Gameshow, won rave reviews. Dominic was educated at St Paul's School, Manchester University and the Webber-Douglas Academy Of Dramatic Art.

You can follow him on Twitter @dominicfrisby