I’m Looking To Re-Establish A Short In This Pair
We closed our short last week in AUD/CAD for
a nice profit of roughly 60 pips. While we are never discouraged by taking
profits, we felt as though there was more to the trade, but technical studies we
follow suggested that we be prudent.
Nonetheless, our macro viewpoint has not changed a bit,
and with the technical picture weakening yet again, we are looking to
re-establish a short soon.
-Â While the Bank of Canada is one of the most
unpredictable Central Banks in terms of monetary policy, the odds of a further
25 bp hike in June seems likely, 25 bp in May, while not priced in, it also
possible if data remains strong and CAD does not appreciate too much in the
interim. Unlike Australia, where another 25 bp hike is seen, they are nearing
the end of their tightening policy, whereas Canada is likely at beginning of a
period of tighter money.
-Â With narrowing interest rate differentials likely
between Canada and Australia, and the prospect of slowing commodity prices (via
rate hikes in the US that are sure to slow growth going forward), AUD/CAD is
poised to test lower levels.
Note this correlation
study between the CRB and AUD:
 
Source: 4Cast, notations in ‘Pink’ — Aspen Trading Group
Â
-Â The Australian dollar tends to weaken versus the
Canadian dollar when global growth is decelerating, of which there are tentative
signs currently
–Â Â Â Â Â Â
The large current account deficit in
Australia, versus a current account surplus in Canada should also weigh on the
cross. The FX markets have continued to flip flop between tow main themes we
have discussed extensively here; current account deficits and interest rate
differentials. Clearly Canada has the edge going forward on both fronts
-Â There is simply a far
higher level of speculative long positions in AUD relative to CAD. While this
is by no means an indicator in and of itself, we feel it dovetails in with our
analysis noted above.
 
Dave Floyd