Technicals were the primary driver for a long AUD/CAD trade I entered Friday. I announced the trade on twitter via FX_Button.
Every Friday, shortly before the market close, I take a look at the weekly charts and see if anything jumps out. This turnaround, along with probably reversals in CHF crosses caught my attention. The reversals in CHF look convincing but I’m reluctant to fight the huge upward trend in CHF.
Let’s have a look at AUD/CAD weekly chart.
The dragonfly doji reversal pattern is what jumped out. AUD also looks strong against USD but with this trade I minimize the difficult risk on/risk off trade.
Breaking down the fundamentals also creates a convincing trade. Despite the furor about the soft AUD jobs data and potential rates cuts this year, we are not yet convinced. The RBA took a small step toward HIKING rates at the last meeting, while warning about potential downside risks off shore. It appears as though some of those risks are coming to pass (esp. in US and Europe) but that, alone, will not be enough for the RBA to cut rates. At the same time, Chinese and Japanese data has been stronger than expected.
The same risks apply to Canada. What leaves CAD more vulnerable is that the market is pricing in rate hikes in Canada in the coming six months. With US growth faltering, we highly doubt those hikes are still on the table. If fact, we see the BOC as more likely to cut rates that the RBA.
With this trade, we will look to add around 1.03 for an initial target of 1.05. So far the early Asia-Pac trade has been good to us after a curious rally in CAD in the final 30 minutes of trading on Friday but us behind 35 pips almost immediately. Those losses have been recovered with the pair gaining 80 pips so far this week.
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