CAD/ZAR, AUD/CAD Vs EUR/JPY and CAD/JPY as Risk Measures

Brian Twomey Brian's Investment

The measure of trader preference to take on risk trades or play it safe as risk off is assessed in currency markets by 4 most prominent currency pairs: CAD/ZAR, CAD/JPY, AUD/CAD and EUR/JPY. In EUR/JPY and CAD/JPY are risk pairs while CAD/ZAR and AUD/CAD are classic risk off pairs, play it safe. Longs in EUR/JPY and CAD/JPY results in automatic shorts in CAD/ZAR and AUD/CAD which informs overall, markets are willing to take on risk.

The traditional price laggard pair in the risk off alignment is AUD/CAD while CAD/ZAR is lightening fast responsive to market prices and is the best risk off assessment in currency markets. The positive to AUD/CAD's slow move price is it becomes overbought / oversold far quicker than CAD/ZAR and serves as a forward indicator to risk determinations. Short term weekly and monthly risk on / risk off trades are found in AUD/CAD while longer term CAD/ZAR serves well.

Why AUD/CAD wins in the overbought / oversold evaluation is because traditionally it not only trades between CAD/ZAR and EUR/JPY, CAD/JPY but historical price moves from monthly averages barely see a 200 to 300 pip difference while CAD/ZAR changes by 1000's of pips.

When AUD/CAD topped at 1.0216 in early June and dropped 263 pips to 0.9952, EUR/JPY jumped 221 pips from 122.26 to 124.47 and CAD/JPY skyrocketed 339 pips from 80.84 to 84.23. June saw a rare deviation in CAD/ZAR as it climbed 259 pips from 9,3891 to 9,7488,

Current domination in ZAR is early June's GDP down minus 0.7%, Manufacturing off by minus 3.7% and 7 of the 10 manufacturing categories tracked for GDP calculations were off. Number 2 Export in Motor vehicles sales currently suffers a 7.2% yearly decrease in new, used and parts accessories. April's Trade Balance Stats, released in May, revealed Vehicle and Transport Equipment were off by ZAR 2.2 billion, down 18% from February. Overall Trade Balance was ZAR + 5.08 billion thanks to Minerals and metals as all remainder Trade Export categories were negative.

Canada's Exports rose 14.7% year over year , 3.2% for March and 1.8% for April and led by passenger Cars, light trucks , parts and energy. All 7 of the 11 categories covered by official Global Affairs Canada recorded positive. Overall, Canada's Trade Surplus Vs the US widened to USD 5 billion in April from 3.4 billion in March and largest surplus since May 2014. The US is Canada's largest supplier of Agricultural foods to include Vegetables, fruits and drinks.

AUD and ZAR share a relationship in Iron Ore exports especially to China as AUD and ZAR are the world's largest suppliers of Iron Ore.

CAD/ZAR and CAD/JPY's position in the overall risk assessment for June traded directly to EUR/USD as both CAD/ZAR and CAD/JPY Vs EUR/USD are either ready to cross higher above EUR/USD or severely tumble. EUR/JPY is the laggard pair. See my blog for pictures.

While CAD/ZAR and AUD/CAD describe risk profiles for EUR/JPY and CAD/JPY, the correct view to encompass other currency pairs within the risk parameters is EUR/USD Vs CAD/ZAR because of the constant and widely negative Correlations EUR/USD shares with CAD/ZAR. Think CAD/ZAR as DXY and one may understand the vital import to CAD/ZAR as its a USD pair and opposite to EUR/USD.

Both EUR/USD and CAD/ZAR prices share the widest extremes among currency pairs therefore correct positions for AUD/CAD, EUR/JPY and CAD/JPY are found between EUR/USD and CAD/ZAR. Anytime CAD/ZAR and EUR/USD prices trade close to each other then prepare for a big and long lasting move. Likewise, when wide extremes is the order then again, the big move is on the way. In August 2008 crisis, EUR/USD traded at 1.4100's to 1.2200 as CAD/ZAR skyrocketed to 20.00's. Today, EUR/USD trades 1.1100's Vs 9.7400 for CAD/ZAR. CAD/ZAR's price is low and EUR/USD prce to high. Any pair outside the CAD/ZAR Vs EUR/USD parameters must come back inside the channel.

CAD/ZAR and AUD/CAD are USD pairs yet true commodity pairs and serves the risk off determinations while both pairs provide signals to EUR/JPY and CAD/JPY.

Author

Brian Twomey

Brian's Investment

Brian Twomey is an independent trader and a prolific writer on trading, having authored over sixty articles in Technical Analysis of Stocks & Commodities and Investopedia.

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