Some great analysis from UBS:
"AUDUSD ended the week almost 5% lower below 0.98 while USDCAD closed just below 1.03. Clearly, commodity currencies are likely to remain at risk while investors flee towards safe-haven currencies. But another factor weighing on commodity currencies will be Asian central banks having to 'rebalance' their foreign exchange reserves. As Asian currencies have come under sharp pressure, the region's central banks have intervened aggressively especially at the end of this week to stop their domestic exchange rates falling faster. As a result they have run down their holdings of US dollars. In order to rebalance their foreign reserves, Asian central banks are thus likely to sell EURUSD, GBPUSD and AUDUSD and buy USDCAD and USDJPY to maintain the share of the greenback stable in their reserves.
This is the opposite of central bank reserve diversification. It was a very significant activity during 2008 when central bank reserves fell sharply as emerging market currencies tumbled and it is likely to again support the US dollar now against the other major currencies. As the Australian and Canadian dollars have been disproportionately favoured by central banks diversifying their foreign exchange reserves accumulated over 2009-2011, these commodity currencies are at risk. As a result we issued a trade recommendation to buy a three month USDCAD call spread with strikes at 1.0317 and 1.0969 this week. But central banks are unlikely to completely abandon commodity currencies. One major reserve manager we visited this week in Asia still favoured the Australian dollar if sentiment stabilises in the financial markets.
