Trade Idea: Sell AUDCAD - Once Bitten... Still Not Shy

 As a general rule, when I am consistently losing money trading one product, I tend to avoid that product in future. In this case though, when I looked at my original sell AUDCAD trade a bit more heuristically, I realised that actually there was still a reason to be short AUDCAD. 

SELL AUDCAD: Entry 0.93090, TP 0.91461(1.7%), SL 0.94300 (-1.3%)

A couple of days ago, I put on my short trade only to be quickly stopped out on the circled move below. 

That was one painful candlestick move higher. My rationale behind the trade was simple - the Australian economy is being hit hard by the delta variant and harsh lockdowns are in place to try and quell the new outbreaks. Meanwhile, in Canada, we have a snap election coming up, and my view is that once this cloud of uncertainty passes the Loonie can start to regain some of its recent losses. 

What I failed to anticipate was a Canadian GDP reading which was miles away from consensus and actually showed the Canadian economy contracting in the Q2. (Consensus of 2.5% QoQ Annualised versus actual -1.1%). Likewise, in Australia data yesterday showed the economy grew faster than expected in the Q2, so we had this double whammy of worse in Canada and better in Australia. Naturally, AUDCAD went higher. 

After retiring for the day in a bit of a sulk as I tried to work out what had gone wrong (in hindsight this was obvious, I hadn't expected GDP data to still be so volatile), I realised that actually though, the fundamental rationale of the trade was still in place. Furthermore, there is now the added benefit that AUDCAD is coming into some more significant resistance. 

Source: Bloomberg

It is clear we have moved very far, very fast, and AUDCAD is looking overbought on RSI and a number of other measures too. 

Obviously, AUDCAD is a function of both the AUDUSD and USDCAD rates, so it is important to look at these charts too. From what I can see, AUDUSD is about to run into some resistance (RSI on the 4h looking overbought), and USDCAD still looks a long way away from its fairer trading value given continually elevated oil prices. 

Source: cTrader

Source: cTrader

Last thing I just had a look at was some correlations of AUDCAD with various barometers of risk. Firstly, the beta of AUDCAD to the Bloomberg Commodity Index, S&P500 and crude oil is positive (albeit the correlations are actually quite weak - especially to oil at 0.07 (last 2 years, weekly)). But sustained gains in broader commodity prices seems unlikely to me anyway with all commodities still at elevated levels. On the other hand, oil, which Canada is more exposed to, could continue to remain around these levels as OPEC+ remains prudent with production increases. With the S&P500 doubling in the past year too, I'd be hesitant to say that there is much further upside available in the near term at least on that front too. 

All of this means, that AUDCAD may struggle to find a reason for much significant further upside, hopefully pointing to a fairly decent risk reward. 

SELL AUDCAD: Entry 0.93090, TP 0.91461(1.7%), SL 0.94300 (-1.3%)

Once a week or so, I will provide an update on the progress of this trade. The horizon is until the Canadian election is out of the way.