FX Daily: Trive Bullish on AUD/CAD

Strong employment data and rising inflation expectations, reinforce the RBA's cautious stance on rate cuts. However, RBA's Governor Bullocks emphasized that inflation is still too high, signalling no near-term rate cuts, which supports the AUD. In contrast, the latest BoC minutes revealed that consumer spending in Canada remains weak, posing additional risks for 2025 and 2026. Simultaneously, the most recent employment data indicates further cooling in the labour market. Combined with slowing consumer spending, it is becoming increasingly evident that Canada's economy is trending downward, putting further pressure on the CAD.

AUD: Hawkish RBA

In the past trading week, the AUD outperformed all other G10 currencies, driven by several supportive factors. First, Australian inflation expectations rose to 4.5% in August, up from 4.3% in July. Second, Australia’s July 2024 employment report exceeded expectations, with 58.2k jobs added, far surpassing the forecasted 20.0k. Although the unemployment rate edged up slightly to 4.2% from the expected 4.1%, the participation rate increased to 67.1%, indicating more people entering the labour force. Full-time employment also saw a strong boost, with 60.5k jobs added compared to the previous 43.3k. While the uptick in unemployment might raise concerns, it largely reflects the higher participation rate, which is a positive sign of a growing labour market. This robust job data strengthens the case for the Reserve Bank of Australia to maintain its current rate stance without rushing to cut.

Additionally, in a recent speech, RBA’s Deputy Governor Bullock emphasized that underlying inflation remains too high, and the board does not anticipate cutting rates in the near term, deeming it premature. Her comments suggest that monetary policy may stay restrictive for some time. Overall, these domestic factors should continue to support the AUD in the near term. However, external factors, such as weaker global demand, are the biggest downside risk. In this context, news from China is concerning, with steel production plunging 9% both m/m and y/y, and year-to-date production down 2.2%, driven by the ongoing real estate downturn and a sharp drop in iron ore prices. These developments could renew downside pressure on the AUD.

The RBA meeting minutes released on Tuesday continue to reveal that the RBA remain concerned about the inflation outlook and did not rule out any hike. Moreover, the central bank provided no major surprises at the last meeting, keeping the Cash Rate unchanged at 4.35%, as predicted by 32 out of 33 economists surveyed by Reuters. The RBA also maintained its hawkish stance, reiterating its determination to return inflation to target and keeping all options on the table. It acknowledges that inflation remains above target and is proving persistent. As a result, the hawkish rhetoric in the meeting minutes could further bolster the AUD in the near term.

CAD: Weak economic growth

In the context of Canada's economic landscape, the BoC implemented a second rate cut at its July meeting, lowering the overnight rate from 4.75% to 4.50%. BoC Governor Macklem indicated that further rate cuts are possible if inflation continues to ease in line with the BoC's forecast, but emphasized that future decisions will depend on incoming data, particularly in the shelter and services inflation categories, which are closely monitored by the BoC.

Adding to the economic concerns, Canada’s July S&P Global Manufacturing PMI fell to 47.8 from 49.3, indicating ongoing pressures on economic growth, especially within the manufacturing sector. The declining confidence among manufacturers could lead to more cautious behaviour in investment and spending, potentially weighing further on Canada’s economy. The latest BoC minutes revealed that consumer spending is also slowing down, posing additional risks for 2025 and 2026. Many Canadians are hoping for rate cuts to ease mortgage interest costs, but as rates remain elevated, those renewing fixed-rate mortgages in 2024 will face significantly higher rates, reducing their purchasing power.

The latest Canada July employment report further signals a cooling labour market, with employment change coming in at -2.8k from -1.4k, while the unemployment rate remains at 6.4%. Combined with the slowing consumer spending, it is increasingly clear that Canada's economy is trending downward.

AUD/CAD 4H Chart

AUD/CAD Current Retail Sentiment

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