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What is Driving New Zealand, Australian Dollars to Bigger Trends?

What is Driving New Zealand, Australian Dollars to Bigger Trends?

John Kicklighter, Chief Strategist

Talking Points:

  • The 'Comm Bloc' refers to the Australian, New Zealand and Canadian Dollars
  • This group of currencies has proven more consistent with volatility and more productive with trend these past months
  • Commodity prices have proven a clear driver for CAD, but AUD and NZD draw their performance from carry appetites

See the DailyFX Analysts' 4Q forecasts for the Dollar, Euro, Pound, Equities and Gold in the DailyFX Trading Guides page.

Over the past weeks, we have focused on major themes (risk, monetary policy), event risk (NFPs, rate decisions) and the most liquid currencies (Dollar, Euro, Yuan). Yet, in that time; there has been a remarkably consistent charge of volatility and even trend in an uncovered corner of the FX market: the commodity currencies. Amongst the majors, that officially refers to the Australian, New Zealand and Canadian Dollars (AUD, NZD, CAD). All three have experienced periods of greater volatility and/or trend development than their more liquid counterparts. It is worth highlighting what was motivating these moves so that we can prepare for any subsequent, large swings due going forward.

While the trio may be grouped under the commodity umbrella, that wasn't the consistence source of volatility and trend development for all three. A relationship to natural resource - specifically crude oil prices - was particularly the foundation of the Canadian Dollar's impressive swings over the weeks. The correlation between oil and USD/CAD is remarkably strong over the months and years, and its sharp moves in range are no different. The energy market's sharp move range high at 51.50 and subsequent retreat from that boundary aligned directly with the USD/CAD's tumble and reversal. Moving forward, whether we are looking for range swing or ultimate breakout from month's long wedge; it will be important to monitor commodity prices.

Both the Kiwi and Aussie Dollars still have a strong economic connection to the raw material exports that their respective economies produce (agricultural and energy/ferrous metal respectively). Yet, the speculative tides rise and fall under another power source: carry trade appetite. The swell in the Deutsche Bank Carry Trade ETF clearly aligns to the performance of these two currencies - even if their pace has trailed the composite's climb recently. This creates a greater dependence for pairs like AUD/USD and NZD/USD on contributing factors like risk trends and rate forecasts ahead. We look more closely at what is driving these pairs and their various technical standings in this Strategy Video.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.