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Commodity Currencies Enjoy The Weak Dollar

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Back in late January when the COVID19 crisis was just beginning to sprout legs, we looked at commodity performance during the 2003 SARS outbreak and concluded that this developing pandemic presented a good bearish case for commodity currencies, while particularly highlighting Asian markets, such as the Australian Dollar (AUD).

Blast from the Past-1

Much Welcome Relief

While past performance is very speculative, it does give traders somewhat of a leg to stand on for the sake of comparison. While this current dilemma is farther reaching than what the world experienced back in 2003, in a similar way it took commodities about six weeks to bottom, and now we are seeing some price relief.

A significant portion of this relief is now further demand created by China. Face it, the world still must eat, right? Since then the Australian dollar has seen a nice lift. In fact, the chart below shows that the AUD has performed well as of late against the U.S. dollar (AUD/USD) and the Japanese yen (AUD/JPY), both of which are historically considered to be more safe-haven assets. 

AUD-USD and AUD-JPY


 

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In fact, as of today the AUD has now retraced back to the 50% marker of the 2020 sell-off against both the USD and the JPY. In a more macro sense, as long as this currency was below that halfway marker, there was a much better case for another wave of selling, and perhaps a retest of the low made nearly a month ago. However, given the indication of how firm this market has been, it’s starting to look more like a green light to trade the AUD with some stronger bullish conviction, especially as the world continues to see COVID-19 trajectories flatten.

Italy and Spain COVID numbers

Risk-On Is Back

In the U.S., the trajectory is starting to show some flattening, while at the same time today’s (April 9) weekly jobless claims came in again at record levels. The U.S. equity markets continue to rise as it seems that asset managers are growing more comfortable with a risk on posture looking toward recovery. After all, the Fed has given record-setting ammunition for a stock market recovery, which in turn may keep the pressure on the U.S. dollar, which in turn gives even more assistance to trades that benefit from a weak USD.

One more example of a market that is benefiting from a commodity bounce and a weaker U.S. dollar is the Canadian dollar (USD/CAD). Canada’s major export is oil; their currency is closely aligned with the price of oil. When the CAD is rising it means the USD/CAD is going lower. As you can see, while oil is rebounding it still hasn’t reached the 23.6% retracement of this year’s sell-off. 

AUD-CAD and Crude Oil

Meanwhile, the CAD has rebounded about 40% of the losses it suffered, as the USD/CAD rallied so heavily while oil was in a free-fall. The next logical and technical target for the USD/CAD is to continue lower, back to the halfway point of this year’s range around 1.38. 

However, if you are trading any CAD pair, you must note that the underlying oil market is not only affected by the current supply and demand situation stemming from the COVID-19 outbreak, but is also vulnerable to headline risk surrounding the production talks between the U.S. and Russia, as well as OPEC.

 

Posted by Fair Value Trader on April 09, 2020
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