October 18, 2013

AUD/CAD: US Political Events Says It All


Political events in the US is the focal point for most forex markets. Analysts in forex Australia believe that these events would be the key driver of AUD/CAD in the near term. Deutsche Bank specifically perceive the Canadian dollar to constantly underperform the AUD until such time that there will be a more visible sign of a longer-term debt ceiling and budget deals are settled. The extent to which Chinese policy makers are convinced to target near term growth is of crucial importance.


S&P500 being the measure of risk sentiment have lost some of the gains earned during the second half of the week as forex news on deals of a short term debt ceiling extension was not accommodative. Even then, it will experience the uncertainty over a longer term agreement extend for more weeks, even if such deal is assumed closed in the succeeding days. This suggests new restrictions on investor sentiment. A prologed recovery in risk sentiment will need a more visible sign that long term deals to fund the budget and raise debt ceiling are near to being reached.

Canadian Dollar

Forex Australia analysts are keen to note that the CAD is particularly sensitive to US political events as well. The importance of US economic news to Canadian economy is interpreted as CAD has been sensitive to investor sentiment hovering around negotiations in US government. Technically, this is illustrated in the correlation of daily moves in the S&P500 and daily movements in the AUD/CAD becoming negative in October. It is the same period since the partial shutdown began. This simultaneously reflected the correlation of daily movements in the S&P500 and NZD/CAD as well.

China FX Drivers

Forex Australia brokers likewise expect how investor sentiment in US progress consequent to that of investor sentiment in China would react in the longer term, while in the short term it is primarily US political events that are driving the AUD/CAD. Historically, this is consistent with past FX performance where relative FX datapoints or relative stock market trends have been an important benchmark to the movements in AUD/CAD.

Over the long term, forex Australia brokers expect a wider room for forex surprises given the Chinese economic outlook, on the high and low sides, while in the near term, investor sentiment on the US economic outlook would be more volatile. It thus show foundations of a firmer US economic recovery to be in place as the market expects. On one hand, there seemed to be a greater disparity of investor views emerging from the Chinese economic outlook.

Deutsche Bank further indicated that given this disparity, they will be very interested in upcoming Chinese indicators – not least the monetary aggregates. This is both for what they indicate for the relative performance of China plays. However, more fundamentally it tells investors about Chinese policy makers willingness to tolerate or target credit driven growth in the near-term. In this context November’s Third Plenum will also be very important in the future FX outlook.


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