Quotable

“He who establishes his argument by noise and command shows that his reason is weak.”

–Michel de Montaigne
 

Commentary & Analysis

Will Aussie follow Cad’s path – down against the dollar?I don’t know, but willing to bet…

I realize correlation isn’t causation.I realize correlations can change at any moment because every moment in the market is unique.I realize it isn’t always easy to determine which variable leads and which follows in a seeming correlation; it may be neither as both may be driven by some other narrative/variable/rationale, etc. But sometimes divergences in prior correlations which have stood for a while can represent nice setups for a winning trade.  

We have overlaid CAD/USD (red line) on our Australian dollar weekly Wave chart, and have included the 2-yr yield spread AU-US in the bottom pane:

Note the relative weakness in CAD versus Aussie as compared to the US dollar. That is a divergence. It’s the same story on the yield spread; Aussie’s once dominate 2-year spread over the US has fallen from a high of around 4.6% when the Aussie peaked (1.1089) back on 8/12/2011 to 0.41 today. If the Fed meets current expectations, this spread will likely go negative in 2017.

I say the same story because it seems the US Fed will be moving sooner than the Reserve Bank of Australia. And maybe today’s Chinese PMI news adds more validity to that expectation…

China’s April Purchasing Managers Index (PMI) was weaker than expected in April…if you compare the China PMI chart below to the AUD/USD weekly chart above, I think you will see a positive correlation there too.