AUD/USD

Back on 27/1/2012 I wrote the following:

"Ray Dalio is bearish AUD/USD along with other emerging currencies...Why? Below are some thoughts:

1) If Ray thinks the AUD will go down along with other emerging nations, he probably believes China will go through a hard landing.

2) If China go into recession, demand for metals will go down sending the AUD/USD down.

3) China is also the 2nd country after the USA in terms of GDP, should their demand for metals go down then that should affect the currencies of other emerging countries whose exports to China would fall hence sending their currencies down; it’s a game of supply and demand.

4) EUR going into a recession might not affect the US much but China would definitely feel some pain.

5) AUD/USD is a pair that is extremely sensitive to news from China. AUD/USD is also a pair that reflects global equities health, should the pair crash then that shouldn't be too positive for global equities.

6) Technically, the AUD/USD is in a weekly distribution base. A breakdown could cause mayhem.

7) This will especially have adverse effects on steel and basic materials which is already lagging (SPY/XME).

P.S. Bridgewater is also bullish gold which is pretty obvious with all the central banks printing, he sees inflation thus buying gold as a hedge."

Its now time to review what happened though these two weekly  charts of the AUD/USD and the XME.

Now statistically speaking, the AUD is overpriced when compared with the USD. To conduct the quantitative study, I took the USD ETF (UUP) and the AUD ETF (FXA). The correlation between the two is -89%. The average spread of the two currencies over the past 5 years has been      -9.14 with the spread currently being at 8.45 (FXA being overpriced). At the time my article was written the spread was at ~20 at 1.5 standard deviation. A revert back to the mean is to be expected with a cointegration taking place.

It will be very interesting to see how these two instruments play out over the coming months especially given the current bearish outlook on the global economy.