We like the Australian dollar ahead of the RBA minutes for a short-term trade and since AUD/CAD has acted as we expected, we’re going to add to our longs here at 1.0295.
We bought AUD/CAD on Friday at 1.0248. Read about it here:
Our catalyst for buying now is today’s release of the Aug. 2 Reserve Bank of Australia meeting minutes at 0130 GMT . If we remember back to the previous meeting minutes, the RBA came out more hawkish than expected and it led to a 500 pip boost in AUD/USD and 400 pip boost in AUD/CAD in the next two weeks. We expect to see something similar, albeit not as dramatic.
We like the trade because we believe there was a lively debate about hiking rates at the meeting. The discussion took place one week after Q2 CPI hit 3.6% y/y (compared to 3.3% in Q1). Officials in the statement emphasized that inflation had peaked but we don’t believe this was a universal sentiment. We also believe upbeat talk about the domestic economy could give AUD a boost.
The downside risks relate to offshore activity. The RBA was incredibly smart/lucky not to hike rates ahead of the wave of risk aversion that hit markets just hours after the decision. They noted external risks and, of course, some of those have come to pass. The risk to our trade is that the market will ignore upbeat comments on inflation and growth and recognize that some of the downside scenarios related to offshore developments have come to pass. Any discussion about cutting rates would cripple our trade but we see it as a less than 1% chance.
On balance, even if the main downside scenario comes to pass, we don’t see a large scope for AUD to fall.