AUD/CAD 4H

Macro View:

AUD: Australia's monthly CPI data reinforces expectations of another rate hike by the RBA in their August or September meetings. The year-over-year CPI in May accelerated from 3.6% to 4.0%, while the trimmed mean measure increased from 4.1% to 4.4%, both surpassing expectations. OIS pricing now indicates a greater than 50% probability of a 25bp hike by September. At the last policy meeting on June 18th, Governor Bullock suggested a bias towards a rate hike, noting that the possibility of a hike was discussed, while a rate cut was not.  The next RBA meeting is scheduled for August 6th, with the Q2 CPI data release on July 31st being a critical factor. If upcoming activity data and the Q2 CPI data are weak, the RBA might hold off on hiking rates.

However, from an FX perspective, this situation supports higher yields and suggests a longer period before the RBA considers a rate cut, reinforcing a gradual move higher for AUD/USD. For the AUD, strong CPI data will benefit it against the NZD and CAD, but the currency may continue to struggle against the USD due to weak iron ore prices, a declining CNY, and investor caution ahead of the US core PCE data release later this week.

CAD: Despite the surge in May inflation to 2.9%, up from 2.7% previously, one month of data is unlikely to reverse the disinflation trend observed in Canada since January. Additionally, the market might be factoring in potential economic troubles in Canada, viewing inflation as an outdated issue due to looming recession concerns. A Canadian recession could lead to an overweight in Canadian bonds, especially compared to countries where central banks might not cut rates as much as the BoC. Overall, with the markets anticipating that the RBA will maintain higher rates for longer and potentially hike rates in September, while the BoC might implement more rate cuts, the policy divergence between the RBA and BoC remains relevant and in play.

FX View:

DXM: A Tool to Gauge Retail Sentiments

AUD/CAD Current Retail Long/Short Position

The DXM shows that 15% of traders are bullish, while the remaining 85% 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.

CAD Futures’ seasonality movement

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

Sources: Prime Market Terminal

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