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Day one: our potential AUD/CAD trade

Potential short AUD/CAD at 0.9995, stop loss at 1.0145, potential target at 0.9770.

AUD
Source: Bloomberg

Technically and fundamentally, short AUD/CAD trades make sense, with both momentum and trend suggesting downside risks are in play.

A potential strategy could be to sell a slight rally in the pair, just below the May 28 low, and I feel placing stops just above the 61.8% retracement of the sell-off from the June 28 high makes sense in case of a change in trend.

A simple look at the MACD, stochastics or just through simple moving averages, highlights the downtrend here.

Fundamentally we are seeing signs of central bank divergence, with the Bank of Canada (BoC) fairly neutral, while the RBA has started becoming more dovish and keen to guide the AUD lower.

Canadian inflation has picked up of late, while its terms of trade are also improving. This can be seen in the BoC commodity price index, while the strong leverage Canada has to the US should see Canadian exports benefit from a pick-up in second half growth.

In Australia we saw a terrible May trade deficit last week, while retail sales fell 0.5% and should shave about 0.2 percentage points off the Q2 GDP print (on September 3). Traders will be keen to see the Australian employment report on Thursday, with expectations of 12,000 jobs created (the economists range is +35,000 to -4,500).

The interesting dynamic here is that a poor jobs report, followed by a weaker-than-forecast CPI print on July 23, could see heightened expectations around a cut from the RBA in the following months. The Q2 CPI print is expected to remain above at the top end of the RBA’s target, so even if we do get a modest miss it is unlikely inflation will hugely affect market pricing around interest rates.

Also on Thursday we get China’s trade data and economists expect the surplus to widen as exports grew 10.2%, with imports expected to increase 5.6%. Traders will not just be keen to look at export strength and how that feeds into assumptions of the upcoming GDP print, but also the levels of imports from Australia. Given the recent weakness in Port Hedland iron ore statistics, I expect this to be a strong focus for traders.

I like the fact that this trade removes the carry trade thematic which is in play in the market and focuses much more closely on growing divergence at a central bank level.

Spot FX AUD/CAD chart
Click to enlarge

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