Summary:

Australia's April inflation was stronger than expected, leading the market to believe that the RBA will continue raising rates for longer, possibly until the end of the year, before considering a rate cut. In contrast, the ongoing slowdown in Canadian inflation increases the likelihood of a rate cut by the BoC in June, highlighting a clear policy divergence between the RBA and the BoC.

AUD/CAD 4H

Macro View:

AUD: With all three CPI measures surpassing expectations, it's likely that the RBA will stay on the sidelines for an extended period. The primary factor influencing the RBA's decision to cut rates remains the labor market, which continues to show tightness despite a rise in the unemployment rate. This makes an RBA rate hike highly unlikely. They won't cut rates until inflation drops further, but they will be very hesitant to raise rates again. Additionally, recent developments in China could bolster the strength of the AUD. Chinese authorities are considering a proposal for local governments to buy unsold homes, a move aimed at lifting the Chinese property sector, which benefits the AUD since China is a key importer of Australian commodities. Furthermore, markets expect continued AUD outperformance as equities rally, aligning with AUD’s historical performance in a pro-cyclical macro backdrop. Australia is one of the few G10 economies with room to ease fiscal policy, and as markets see the first signs of this fiscal easing, the downside risk to RBA rates is likely to decrease over time.

CAD: The Canadian rate market now anticipates a higher probability of an earlier rate cut from the BoC following the release of April's inflation data. The report revealed that core inflation surprised to the downside for the fourth consecutive month this year. The average of the core CPI measures (trim & median) slowed further to an annual rate of 2.8% in April from 3.1% in March. With inflation moving closer to the BoC’s target and Canada's economy growing below potential, there is now room for the BoC to make their policy rate less restrictive. As a result, markets expect the first BoC rate cut at the June policy meeting.

FX View:

DXM: A Tool to Gauge Retail Sentiments

AUD/CAD Current Retail Long/Short Position

The DXM shows that 4.5% of traders are bullish, while the remaining 95.5% are bearish, reflecting the predominant retail sentiment. This sentiment offers a contrasting trading opportunity since retail traders tend to consistently lose money in the long term.

Seasonality Analysis: The Historical Movement of the Currencies  

AUD Futures’ seasonality movement

The seasonal pattern for the AUD suggests bullish momentum in the near term.

CAD Futures’ seasonality movement

The seasonal pattern for the CAD suggests bearish momentum in the near term.

Sources: Prime Market Terminal

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