Dan Dorrow of Faros Trading continues to expect the Australian dollar to perform well on the strength  of Asian economies.

Australia has an export-driven economy and its biggest export customers are China, Japan, South Korea, and India. 

While Japan’s economy may suffer temporarily, China, South Korea, and India are expected to continue to grow at a blistering paces – certainly faster than growth rates of the US.

Dorrow, therefore, recommends buying the Australian dollar against the Canadian dollar – which in many ways is the North American counterpart to the Australian dollar.  (Canada exports huge volumes of goods to the US and its economic performance is heavily tied to the US.)

Asian currencies (except for the Japanese yen) aren’t readily tradable for most forex traders, so AUD/CAD is a good proxy for the Asian outperformance against the US theme.  AUD/USD may also work, but the pair is often driven by global risk sentiment and US monetary policy expectations.

There are two more factors that favor the long AUD/CAD trade, said Dorrow.

One, Australia’s economy is at full employment while the Canadian economy is not, meaning Australian is in more danger of accelerating inflation and thus more readily poised for rates hikes in that regard.

Two, the market priced in a rate hike for the Bank of Canada in the next six months while the Reserve Bank of Canada is expected to remain on hold.  Therefore, any rate policy surprises are likely to be on the downside for the Canadian dollar and on the upside for the Australian dollar.

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