Forex Flash: AAA yields influence AUD/CAD cross – Westpac

FXstreet.com (Barcelona) - The AUD/CAD has spent a modest 6.6% of its post-1983 trading days in the 1.05-1.1000 band. However, “it is still far too soon to expect a move to near the 0.9400 long-term average as Australia continues to benefit from the growth in its key East Asian trading partners, while Canadian exporters are constrained by the patchy US recovery (Westpac forecasts 1.6% growth in 2013).” writes Global FX Strategist Sean Callow at Westpac.

The US buys 74% of Canada’s exports, while China receives 29% of Australia’s goods exports (around 24% incl. services). The large wedge between the AUD/CAD and the 2-year swap spread in recent years is similar to the gaps seen on other AUD crosses, however at least the latest AUD/CAD rally is backed by a rise in AUDs yield pickup.

The IMF will publish separate AUD and CAD reserve holdings this year and Australia has the highest yields of AAA sovereigns. However, Canada is also AAA and offers far greater liquidity, with USD $870B on issue vs. $279B in Australian sovereign debt, a gap which will widen as Australia’s government pursues tighter fiscal policy.