Forex Investment and Currency Trading

Bad day for the AUD
Broadly lower commodities and equities in the overnight leant a weak tone to the AUD in early trading. With USDJPY under pressure from the fall in Treasury yields and on somewhat better than expected Japanese wholesale price data, some reduction in Japanese AUDJPY positions put further pressure on the AUD. Rumours of a large 2- month downside option trade cast a further cloud over the pair; and then bearish comments from China’s Ministry of Commerce to the effect that domestic demand could not be expected to offset weakness in export markets led to a drop in Shanghai stocks, at one stage down 3%. Shanghai is now the ‘canary in the coalmine’ with regard to the continued health of the AUD, and the drop led to further risk-reducing AUDJPY selling. Traders expect that this risk-aversion will continue on technical selling and therefore expect AUD to underperform other majors over the next few sessions. AUDUSD support just below 0.8100 will be key.

USDCAD continues its correction
The July housing starts disappointed with 132Ks 145K expected, while the previous release was revised lower. Indeed the steepest drop was in Ontario indicating the weakness of manufacturing which is tends to concentrate there. Previously, the Canadian labour market disappointed sharply relative to NFP helping USDCAD to retrace higher. This was not helped by a sharply lower Ivey PMI. Overall, rate differentials are unlikely to be the main determinant for USDCAD. Commodities though are likely to continue losing their USD base effect as the USD broadly strengthens. Lower commodity prices would tend to favour USDCAD would it only be that it increases real disposable income. On the other side, Canadian equities in this environment are likely to underperform given that they are more oriented towards commodities. The same argument can be made for European equities relative to the US. Overall this suggests that USDCAD is likely to marginally overshoot 1.10. Right now it is worth waiting for a stabilisation likely above 1.11 to enter again short USDCAD structural positions or preferable EURCAD shorts.