CANADIAN DOLLAR SHOWS SOME PROMISE, AS AUSSIE DOLLAR HIT BY SLOWDOWN

THE RESERVE Bank of Australia is expected to keep rates on hold at today’s meeting, but the news may prove cold comfort for the Aussie dollar-dollar pair as currency traders become increasingly concerned about the rate of economic growth in the Asia-Pacific region. As this week opened for trade, the Aussie was the weakest link in the chain, trailing badly behind both the euro and the dollar in Monday’s dealing action. The pair was hobbled by news from China, where conflicting data on the services sector confused the market.

The official Chinese services purchasing managers index (PMI) declined sharply to 48.4 from 52.9, while the HSBC PMI reading rose to a four month high of 53.9 from 52.5. Meanwhile, former head of Chinese statistics Li Deshui stated that first quarter figures in 2012 may be “ugly” given the very high base rate of growth last year. Chinese officials expect the country to grow by 7.5 per cent this year, markedly less than 9.2 per cent the previous year, as the decade-long torrid pace of growth begins to moderate.

The slowdown in China may already be affecting Australia’s economy. Australia’s own PMI services report disappointed investors, printing at 46.7 against 51.9 the period prior. The subcomponent data was weak as well, with employment declining from 51.2 to 47.5, sales falling to 47.5 from 49.4, and new orders plunging to 45.6 from 54.1 the previous period. The data suggests that the Australian service sector is slowing considerably and this could contribute to lower GDP growth in the first quarter of this year.

Since the end of last year, the Aussie has benefited greatly from the massive decline in the euro-Aussie dollar. With the Eurozone credit crisis in full bloom, real money accounts diversified into the Aussie dollar-dollar, driving the pair higher over the past few months. However, with Eurozone credit problems stabilised for the time being, the pair appears be basing at the $1.2300 level and any short covering rally in the cross will likely keep the Aussie underperforming for the foreseeable future.

With China slowing, Aussie’s only hope for a rally depends on continued upside surprise from North America. If the US recovery gathers momentum, the concomitant rise in equities should keep the risk trade in play and provide fuel for further Aussie gains. However, any disappointment in this week’s US non-farm payrolls report could trigger a steeper selloff on the pair, pushing it below the key $1.0500 barrier.

One interesting way to play the possible Aussie weakness could be through the Aussie dollar-Canadian dollar pair. With oil prices hovering above $100 per barrel for West Texas Intermediate crude, the Canadian economy should see a boost from higher energy prices. Meanwhile, technically, the Aussie dollar-Canadian dollar looks like it has set a double top near the Ca$1.0700 level. If this is the start of the turn in the Australian dollar then the Aussie dollar-Canadian dollar could unwind all the way to parity over the next several months, as the combination of lower growth in Asia and higher energy prices in North America opens the way for Canada to outperform Australia.