AUDCAD: Parity or Parody?

The day that every currency trader the world over had circled on their calendar has arrived as the European Central Bank has introduced their long anticipated Quantitative Easing program at their monthly meeting this morning. The pulling of the EUR/CHF peg by the Swiss National Bank last week only served to increase the excitement and tension around the ECB’s meeting, and the ECB served up a QE program that satiated the masses to the tune of €60 billion per month starting in March 2015 and ending in September 2016. This is larger than the €50 billion per month rumor bandied about yesterday, and the ending is subject to debate as ECB President Mario Draghi stated that inflation needs to be where they want it to be before they would end the program. So in essence, it’s kind of like the Federal Reserve’s QE Infinity, but with a hypothetical end date.

In response to the ECB’s decision, EUR crosses are getting hammered across the board as investors are combing through the details of the decree. Volatility may continue to be excessive as economists voice their opinions on whether it was too big, too small, too complicated, too wonky, or just right; and in response, the EUR crosses could pull several 180’s. That being the case, I’m hesitant to try to look for short term opportunities that could easily be reversed on the whim of a well-crafted article on Bloomberg or a stirring appearance on CNBC. So let’s look at what else is brewing.

The subject of parity in currencies is a fascinating one to me in that two nations that have completely different economies, populations, and monetary policies could essentially use each other’s currencies equally in each other’s countries. That situation is occurring right now in Australia and Canada as the AUD/CAD has surged strongly in 2015 from around 0.95 to 1.00. The interest rate cut from the Bank of Canada yesterday surely assisted this rise, but it has mostly been the relentless slide in oil prices that underpinned it. It is interesting to note that the Fed’s QE3 didn’t subvert the price of oil as it continued to float around $100/barrel for the duration, but once QE3 was tapered away, WTI fell to the sub-$50 levels we now reside. Now that the ECB’s QE has been unleashed, could oil find some room to rally?

On the technical side of the equation, the AUD/CAD is near the top of a trend channel it has been following for most of 2015. Outside of a few recent dalliances above that trend line after the BoC rate cut, it has largely been respected. If that were to continue, the current level of parity in the AUD/CAD may end up just being a short-lived parody as it retreats to lower levels. However, being in a channel means there’s a bottom side as well, so a drop to that support may engender another run to parity in the days thereafter.