AUD/CAD Looks Past BoC Tightening For Reversal

The AUD/CAD is looking to test trend line support following a 25 bps rate hike from the BoC, despite the central bank’s slightly lower outlook for growth. The monetary authority’s comments that financial conditions remain “extremely stimulative” sparked bullish “loonie” sentiment as markets started to price in the prospect for further tightening. Despite the raise to 1.00% the Canadian yield pales in comparison to the Aussie’s 4.50% which has made the high yielder the preferred choice when risk appetite prevails, as was the case pre-rate decision. Therefore, if we continue to see improved optimism and concerns over the European banking system ease, then the continuation of the current ascending channel may be expected.

Levels to Watch:

-Range Top: 0.9680 (Trend, Pivot)

-Range Bottom: 0.9470 (Trend, Pivot)

Charts created using Strategy Trader– Prepared by John Rivera

Suggested Strategy

• Long: Place an entry at 0.9470-range low
• Stop: Set the stop to 0.9400
• Target: The first target is 0.9616-9/8 high

Trading Tip – The channel formation isn’t as clear as we would like, which will keep us cautious and nimble on our entry level. If we take a broader perspective, the case could be made that trend line support doesn’t start until 0.9400. Additionally, the fundamental case for continued “loonie” strength could be made as the RBA is expected to remain on hold, with the potential for further tightening from the BoC. However, the upbeat outlook presented by Australian policy makers has started to raise the outlook for yields and a strong employment report will reinforce the argument for further tightening. Yet, below 0.9400 we would alter our bullish bias, as a break below would expose support at 0.9200.

Event Risk for Australia and Canada

Australia – A strong Australian labor report will put the RBA on alert as rising wages are the biggest potential contributor to headline inflation. Markets are already pricing in a 7% chance for the resumption of tightening after the positive outlook from policy makers following their last rate hold. Forecasts are for the economy to have added 25,000 jobs in August, which would be a sixth straight monthly gain. The Westpac consumer confidence reading doesn’t hold the same market moving potential as sustained job creation, but is a noteworthy release. Rising optimism combined with higher wages is the recipe for runaway inflation, which is what the monetary authority is guarding against.

Canada – The Canadian economic fundamental calendar is still full of event risk following the BoC rate hike with housing starts, export data and the employment report on tap. Forecasts for the labor market to have added 30,000 jobs in August will fuel the outlook for further tightening, potentially adding to current “loonie” support. An expected decline in housing starts could take some of the luster off the economy, but could be overlooked as credit conditions remain healthy. Meanwhile, a drop in export demand could dim the outlook for future growth supporting the central bank’s lower forecasts, potentially weighing ion the Canadian unit.