It's All About Geography

Don't know much about geography
Don't know much trigonometry
Don't know much about algebra
Don't know what a slide rule is for

But I do know that Australia is next to China
And that Canada is next to the United States
And this could be the currency story for Q1 2011



Let me explain my modified take on the old Sam Cooke song, Wonderful World. Last year the AUD was one of the top performing currencies against the USD with an increase of about 14% compared to the CAD which only rose slightly over 5% against the USD. See my post last week regarding relative performance here. Why did the CAD lag? I think the answer is mainly due to geography and a little to do with the price of oil. Geography, yes look at a map and you will see that Australia's biggest market is China. Now look and see where Canada is located, right next to its biggest market the U.S. So my thesis is that the CAD will outperform the AUD this quarter due to geography. Of course, massive flooding in Australia only reinforces my thesis.

China started to apply the brakes by hiking interest rates in late 2010 and will continue to do so in 2011. This will reduce China's GDP and hence reduce demand for commodities out of Australia. Meanwhile, the U.S. has been slowly and steadily gaining economic traction in late 2010 and this should continue in 2011. So signs of stronger U.S. economic growth bode well for the Canadian economy. Add to this a rebounding price of oil and the CAD should easily outperform the AUD, so short AUD/CAD.