Mystery Chart's FX Mystery: Why Isn't The CAD As Weak As The AUD?

Further to my post over the weekend (Would you short this?) From reading the comments, I can see that a lot of my readers got it. The chart is the AUD/CAD currency cross.

While this currency pair shows the Australian dollar to be vulnerable to its Canadian cousin, the loonie, it brings up another mystery.

First of all, the pair may not be as technically vulnerable as it initially appeared because it hit a 50% retracement level on Friday despite breaking down from major multi-year support.

I understand how the hedge fund community seems to have piled into the AUD/USD short as the Aussie dollar has gone into freefall for the last few weeks. The short position has been highly profitable in a very short time.

Here's the head scratcher. Why isn't its Canadian cousin similarly weak against the USD? The structure of the Australian and Canadian economies are very similar as they are both resource based and both about the same size.

Admittedly, Canada did see some surprisingly positive economic releases last Thursday (Ivey PMI) and Friday (employment). On the other hand, how long will it be before all the Aussie shorts pile into a loonie short position as an alternative, especially when the CAD/USD remains in a long-term downtrend and it hit a Fibonacci retracement level Friday and backed off?

For reference, see these bearish posts on the Canadian dollar from Sober Look (Canada's latest job report is a mixed blessing) and FT Alphaville (Canada’s grizzly outlook).

Disclosure: Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

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