[DanRath]

AUD/CAD has been trading in an uptrend since the beginning of the year as an ascending channel pattern has been guiding prices higher. With the recent move higher in prices coming after the daily studies issued a buy signal from oversold levels, greater gains to resistance at 0.9191 are probable, with the high at 0.9394serving as secondary resistance. In terms of downside levels to watch, we note that prices will have to register a daily close below the ascending channel base at 0.8843 in order to generate a bearish trend reversal. This development would then project a deeper selloff to 0.8695, followed by the April low at 0.8556. Therefore, 0.8843 serves as a key pivot point to watch for increased downside risk.

[DanRath]

Interest rate and FX market moves around this week’s RBA announcement were a classic case of “buy the rumour, sell the fact”. The central bank’s move to a neutral bias saw AUD fall back from recent highs and AUD/CAD in particular failed above 0.90 once again. But interest rate markets still price a highly front end loaded tightening cycle in Australia relative to Canada. The near term risk is that AUD/CAD continues to correct lower, reversing the rally of the last two weeks to test support at 0.8800, particularly so if the evidence continues to point to downside risks to Chinese growth and upside risks to US growth.

[DanRath]

That front end yields in Australia should have risen relative to Canada therefore seems sensible, but might the front end loading of rate hike expectations in Australia relative to Canada have gone too far? Developing external risks in both cases suggest this might be the case. Positive developments in China are playing no small part in the Australian recovery story. The relationship between the rebound in commodity prices, especially base metal prices, and China’s economic turnaround is well known. Also, with 15% of Australian exports directly heading to China and an additional 53% to the rest of Asia, which are also directly and indirectly tied to the fortunes of the Chinese economy, the RBA could quickly step away from its expected normalization process if the Chinese recovery falters as the PBoC reigns in excessive monetary stimulus.

Although Canada will also be adversely affected in such a scenario through its commodity-linkages, the impact will be less severe with Canadian exports much less dependent on Asia. Moreover, one of the principal downside risks to Canadian growth – exposure to the US – is at the very least diminishing as the evidence of stabilisation in US output continues to mount, not least this week’s sharp rise in the manufacturing PMI. The BoC will be cautious in taking this news flow on board. But with the interest rate markets fully priced for the BoC’s low rate commitment holding, the risk to rate expectations is asymmetric to the upside. With AUD/CAD having twice failed at the top of the recent range just above 0.90, the risk is for a near term pull-back to the bottom of the range at 0.8800.