Tactically Bearish AUD/CAD on Improving CA Economy, Break Below 200-DMA
Point to Establish Short Exposure: Retracement to 95.50 (9-day midpoint, 200-DMA)
Initial Target/Point to bring a stop to break even:96.00 (2017 Double Bottom – Jan./Dec)
Swing Target (If not holding trade :)Hold with trailing stop
Invalidation Level: 99.50 (50% retracement of March-April range)
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Trading FX has a unique advantage if played well. Namely, a currency with decent upside prospects can significantly outperform if the short side of the trade falls more aggressively than anticipated.
In other words, traders are always placing two trades when entering into an FX trade so it’s important to have multiple biases so that you can see where the low-hanging fruit may lay in the market at any one time. One way I like to identify low-hanging fruit is through short-term momentum that is identified via the RSI(3), which I break down fully in the weekly FX Overbought/ Oversold report that you can access here
FX Overbought/Oversold Readings As Of April 10, 2018
Data source: Bloomberg
You’ll notice above that the dashboard that the FX overbought/ oversold report revolves around is organized via a descending RSI(3). Therefore, the pair on the bottom is the most oversold, currently AUD/CAD and the pair on the top (CAD/JPY) is the most overbought on a short-term 3-day scale.
Put in other words, the Canadian Dollar is the most bid currency in the G10 + crosses right now with the JPY and AUD on the backfoot. The reasons for CAD strength are building and here are a few:
- CA Business Outlook and Sentiment remain elevated with the Q1 reading showing a doubling in expected sales. This likely shows the Bank of Canada that economic concerns of NAFTA negotiations are limited at best.
- Inflation measures that are in focus by the Bank of Canada are near a 5-year high. This is another thing that will likely take the BoC away from a dovish message on April 18.
- Terms of Trade (aggregate value of exports minus aggregate value of imports) for Canada is near the highest levels since 2014 per Citi. If oil remains support, Canada’s Terms of Trade (ToT) should remain elevated and additionally support hawkishness from the Bank of Canada in upcoming meetings.
If the Bank of Canada leans hawkish at an upcoming April 18 meeting, that would likely further lift CAD against weak FX. A recent report of the CFTC Commitment of Traders shows that Canadian Dollar bulls are holding a bullish position in the 25% of the last 52-week range. This could mean that a lot of buyers could come in the market and further lift the CAD against weaker currencies like the Australian Dollar.
CA Business Outlook Remains Elevated And May Favor BoC Hawkishness
Data source: Bloomberg
Access our latest Canadian Dollar Technical Analysis piece here
On the Australian Dollar side, the main focus is that the AU economy remains susceptible to any negative trade war outcomes. While a full-blown trade war appears unlikely given the large account surplus of the Chinese economy and deficit of the US economy that needs each other to continue, the RBA remains stuck in a dovish stance.
At the same time, Australian economic data has continued to disappoint through 2018 and could lead to further losses against strong currencies like the Canadian Dollar.
Technical Outlook Favors Further Bearish AUD/CAD Conviction
Chart Source: IG Charting Package, IG UK Price Feed. Created by Tyler Yell, CMT
The key pivot on the looks to be 98.50/99.50 with spot currently trading low than both at 97.85. The pivot zone comprises the 200-DMA and the 50% retracement of the March-April range. Below the pivot zone, I continue to favor further CAD strength and an eventual move to 96.00 or lower.
A move and close above 99.50 would show that I entered this strong move too late, and it’s time to cut my losses short before looking for another higher-probability trade.
A strong move below 96.00 could mean a broader CAD move is at play, and a trailing stop would be employed to capture the potential regime shift as institutions likely load into the long CAD positions.
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---Written by Tyler Yell, CMT
Tyler Yell is a Chartered Market Technician. Tyler provides Technical analysis that is powered by fundamental factors on key markets as well as t1rading educational resources. Read more of Tyler’s Technical reports via his bio page.
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