AUD/CAD 4H

Macro View:

AUD: During the June meeting, both the post-meeting statement and press conference took a hawkish turn as Governor Bullock mentioned that the Board also considered raising rates to remain vigilant against upside inflation risks. Moreover, the monthly CPI for May accelerated to a six-month high of 4% y/y from 3.6% in April, while the trimmed mean rose to 4.4% y/y from 4.1%. These developments increased the market's expectations for a rate hike in August, which rose to around 26%. As a result, markets are eagerly awaiting the Q2 CPI data, due on July 31, to finalize their expectations. However, global factors, particularly any disappointments from China, remain crucial for the near-term direction of the AUD.

In the coming week, the Australian labor report will play a crucial role in determining whether there will be a further rate hike or a hold. With the unemployment rate trending higher and aligning with the RBA’s 4% forecast for the first half of 2024, any rise in unemployment could lead to a hold on rate hikes, as a loosening in labor market conditions is expected to bring wage growth and underlying inflation under control. Conversely, a stronger-than-expected labor report could increase the likelihood of an August rate hike.

CAD: The BoC cut rates at its June meeting, marking the start of the next stage in the Canadian monetary policy cycle and diverging from the Federal Reserve. This divergence might keep the CAD on the back foot as rate differentials weigh on the currency. Moreover, Canadian growth is recovering, past the worst but still with room for improvement. The outlook is heavily tied to the US economy’s cyclical strength.

Recent comments from Powell, along with the lower-than-expected US June CPI, support the argument that the Federal Reserve can start loosening monetary policy this quarter. Since the CAD often trades as a proxy for the USD, expectations of a US economic slowdown could further weigh on the CAD in the near term.

Moreover, yesterday June CPI shows further cooling on Canada inflation, where it is cooling down to 2.7% y/y from 2.9% y/y, and all the core measures are under the BoC target range 1-3%. This matches the lowest y/y reading since the pandemic and should be the final straw that confirms a July 24 rate cut (it's now 89% priced in). As a result, CAD could continue under pressures for the time being.

FX View:

DXM: A Tool to Gauge Retail Sentiments

AUD/CAD Current Retail Long/Short Position

The DXM shows that 4% of traders are bullish, while the remaining 96% 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 bearish momentum in the near term but the latest economic development in Australia is not favor with this bearish seasonal pattern.

CAD Futures’ seasonality movement

The seasonal pattern for the CAD suggests bullish momentum in the near term but the latest economic development in Canada is not favor with this bullish seasonal pattern.

Sources: Prime Market Terminal

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