Is It Really the AUD/CAD's Year?

From Jack Crooks, Editor of World Currency Options

What's Happening:

I'm guessing you're a happy camper these days if you bought the Australian dollar and simultaneously sold the Canadian dollar at the beginning of this year.

That's because year-to-date AUD/CAD (Australian dollar vs. Canadian dollar) has jumped 1,000 pips - or 11.4%. And in the world of Forex, that's a huge move.

And having just tested its highest level in more than three years, I'm beginning to wonder if this pair could be running out of gas. Buy-and-hold strategists will tell you the trend is your friend, so keep buying and holding.

What We Say:

But we've got a different philosophy that keeps us asking: When is the trend not your friend? And when is the trend going to reverse and take you to the cleaners?

Right now may be one of those times. To me, the one-way climb and the underlying sentiment make this pair vulnerable to downside moves.

Much of my hesitation at these levels is because of what I expect from the U.S. dollar. That's because the Canadian dollar (a commodity currency) has become less tied to other commodity currencies (e.g. Australian dollar) and somewhat more correlated to the U.S. dollar.

Why? Mostly because Canada's economy is closely tied to the wallowing U.S. economy. But maybe, just maybe, the dollar has found a bottom for a little while. If so, then it's possible the Canadian dollar will also get a little boost as well. That means the CAD could outperform fellow commodity currencies and the rest of the major currency pack during a period of dollar appreciation.

Taking the short side of AUDCAD is something to consider. Certainly a decent risk-reward set-up.

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