Although both AUD and CAD are commodity currencies, given Australia’s outsized exposure to China, AUDCAD can be used as a proxy trade on the Chinese economy. AUDCAD is approaching the top of its range just as Chinese liquidity is rolling over.

In our March Leading Indicator Watch, we pointed that although Chinese economic leading indicators are still holding up for now, liquidity conditions are deteriorating markedly. Chinese narrow money growth is slowing just as inflation is picking up. The left chart shows Chinese excess liquidity, where we use PPI to deflate M1 growth. Chinese liquidity has clearly rolled over with a negative read across to commodity markets.

The right hand chart shows that bullish sentiment towards AUDCAD is quite stretched at
the moment, with a sell signal in place. We believe AUDCAD will be vulnerable to the fall in Chinese liquidity. (Click on image to enlarge.)