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scott barlow

The Canadian dollar has become, arguably, the most predictable tradable asset on the planet. It's almost mathematically impossible for the loonie to track bond yield spreads and crude prices more closely. It's not supposed to work this way and I strongly suspect algorithmic trading is to blame.

The two charts below show the ridiculously close relationships between the loonie and two-year bond spreads (the difference between the yield on the two-year government of Canada bond and the two-year U.S. Treasury bond) and the loonie and West Texas intermediate crude prices.

Correlation calculations indicate that the value of the domestic currency follows bond spreads slightly more closely than it follows crude – on the chart they might as well be the same line. But the correlation between the loonie and oil prices is also extremely tight.

Relationship between market-traded asset values are rarely anywhere near this close, particularly on a daily basis as shown on the chart. I asked U.K.-based currency trader Ken Veksler of Accumen Management whether the situation was anywhere close to normal and his response was "It's a joke" (while adding the usual trader expletives).

Someone, or more likely numerous someones, are "arbing" (using arbitrage trading) the loonie against both bond yields and crude, moving quickly to buy and sell Canadian dollars when the currency value gets out of line with moves in either. And, since making money doing this is a matter of moving quickly and no human can hit buttons faster than software can place electronic orders, it is most likely automated trading programs behind the trades.

I'm not sure what all this means for investors, if anything. I can't see this arb trade being really lucrative – the trader phrase "picking up nickels in front of the steamroller" comes to mind – and it's possible that the trading programs will be stopped (just not worth the effort) and the correlation relationships loosen. That shouldn't, however, be a big problem for domestic investors.

Still, it's curious. There are implications that the machines have taken over currency trading and humans could possibly be pushed out of the field entirely. It may also be an indication there's so much central bank stimulus trapped in financial markets, waiting to be put to work, that even marginally profitable trades are attacked intensely.

Scott Barlow, Globe Investor's in-house market strategist, writes exclusively for our subscribers at Inside the Market.