The Canadian dollar has continued to gain traction and remains the strongest performing major this month, putting AUD/CAD on the back ropes just above the 2018 lows.
The Canadian dollar has continued to gain traction and remains the strongest performing major this month. EUR/CAD posted a weekly close beneath its 2015 trendline last week and, whilst here’s risk of a minor rebound the structure remains predominantly bearish after breaking out of a multi-week compression pattern. However, the Loonie’s next potential victim appears to be the Australian dollar, with AUD/CAD on the verge of breaking key support.
Starting with the bigger picture, there are several forces which are weighing on AUD/CAD
- Yield differentials: RBA have cut rates to 1% versus BOC’s 1.75%. Moreover, further cuts from RBA are expected whilst BoC remain neutral.
- This is seeing the AU-CA 2 and 10-year differentials point decisively lower, dragging the cross down with them
- Canada’s economic data is on a tear whilst, overall, Australia’s data continues to underwhelm. We can see on the CESI chart (Citi Economic Surprise Index) that Canada’s data is beating expectations by a wide margin. That said, the CAD CESI is over +2 standard deviations from its long-term average so potentially at risk of a reversing but, for now, continues to outperform the consensus one the less.
- Large speculators have switched to net-long on CAD futures and remain overwhelmingly short on AUD futures.
Technically, AUD/CAD sits at a critical juncture, just above the 2018 low.
- The daily structure is clearly bearish, and the prior two corrections having respected 50% and 38.2% retracement levels respectively. The 20-day eMA is also capping as resistance.
- A break below 0.9100 appears likely at this stage, although we remain bearish below 0.9207.
- Next major support levels are not until the July and June 2010 lows at 08873 and 0.8584 respectively. So we’d seek to trail a stop with an open target towards these.
- Keep in mind the BOC meeting is tomorrow which leaves CAD crosses prone to bouts of volatility. However, whilst BOC are expected to hold, we’d expect a slightly hawkish statement if they veer away from neutral, given the pick-up with inflation and data in general. If so, this should provide another pillar of strength for the Canadian dollar.