Summary:

Australia is one of the few G10 economies with room to ease fiscal policy, as markets see the first signs of that room being used, the downside to RBA rates is likely to decrease over time. In fact, RBA’s Bullock further signaled that not hesitate to raise rates if inflation remains sticky. In contrast, BoC cut 25bps in yesterday's meeting and signal further cut is possible If the economy and inflation stay in line with expectations.

AUD/CAD 4H

Macro View:

AUD: Australia's April CPI surprised to the upside at 3.6% y/y, yet markets are still pricing in no move by the RBA this year. The latest RBA minutes indicate a restrictive policy stance for an extended period. However, RBA’s Bullock highlighted very weak growth in her testimony before a parliamentary committee yesterday and mentioned that the central bank will not hesitate to raise rates if inflation remains persistent. Consequently, the Australian bills strip remains flat, with a slight chance of a hike between August and September, and a small chance of a cut by December. Investors are closely watching data and RBA signals for direction. Additionally, recent developments in China, especially stronger-than-expected Caixin services PMI data, could bolster the AUD. Therefore, both internal and external factors could support the AUD in the near term.

CAD: As expected, the BoC cut the interest rate by 25 bps to 4.75% from 5%. During the press conference, Governor Tiff Macklem emphasized that if the economy and inflation align with expectations, more rate cuts could be on the horizon. However, Macklem noted that future rate cuts will depend on incoming data, acknowledging potential risks. Despite some constraints from U.S. policy, the BoC predicts a gradual reduction in inflation toward the target. Overall, market participants anticipate another 50 bps of cuts in 2024 and more in 2025, which could keep the CAD under pressure for now.

FX View:

DXM: A Tool to Gauge Retail Sentiments

AUD/CAD Current Retail Long/Short Position

The DXM shows that 5% of traders are bullish, while the remaining 95% 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

Disclaimer: This material is provided for informational purposes only and does not constitute financial, investment or other advice. No opinion contained in this material constitutes a recommendation by Trive International or its author as to any particular investment, transaction or investment strategy and should not be relied upon in making any investment decision. In particular, the information does not consider the individual investment objectives or financial circumstances of the individual investor Trive International shall not be liable for any loss, damage or injury arising from the use of this information. Trive International may or may not be able to provide equity in the companies. The value of your investment may go down as well as up.