Resource Currencies: Gilt By Association?

Fewer topics in finance provide more fertile fields than spurious correlation. While the more doctrinaire behavioral analysts may weigh in with a different insight, I think most of these alleged relationships are born in a single Pavlovian instant. Once upon a time, gold rallied in response to every global hiccup -- the Russians invaded Afghanistan? Buy me some gold! -- and that led to years of one-day wonders in the gold market until people finally realized the trade simply had no merit.

My personal favorite trade of this class is the selloff in live cattle futures that often accompanies stock market swan dives. If anyone, anywhere, can demonstrate an instantaneous drop in beef consumption linked to a negative wealth effect linked to a selloff in the stock market not offset by that other knee-jerk reaction, a flight to quality in Treasury bonds, a lifetime subscription to The Journal of Irreproducible Results awaits. Or a sitcom scene: "No, Bobby, we're not having steak tonight, because your daddy (glaring) didn't know when to get out of Kodak."

Canada and Australia

The mind craves a linkage between Canada and Australia. Both are English-speaking after a fashion, both use a currency called a dollar, both are sparsely populated with a population concentrated geographically, and both are major producers of various minerals and energy commodities. As a result of the last attribute, they are referred to as "resource currencies," a label not given to more deserving currencies such as the South African rand, Russian ruble or Saudi Arabian riyal.

Compounding the problem are the near-identical paths the two currencies have taken over the past year and a half. Never mind the divergent paths the Canadian (CAD) and Australian (AUD) dollars took between 1988 and 1998, a period during which the price trends of global commodities surely were the same for both. They are moving quite identically of late, and this development will no doubt create a future generation of currency traders willing to trade one off the other.

A Recently Convergent Path

Source: Bloomberg