Apologies for my recent quietness, but I have exams through January so naturally they're taking a priority... don't get me wrong, I'm as active in markets as ever just haven't quite had the time to write down any thoughts.
Anyway, here's my trade idea for the next couple of weeks - Buy AUDCAD with a target of 0.925 and a SL at 0.896 (Current 0.907).
Starting with some technicals. AUDCAD has been int his downtrend for a while and we can see we are close to the typical lows of the trend. There is definitely room for a bounce. Likewise, we are pretty close to the 50d SMA so a move above this could be a catalyst for further upside. Finally, we are seeing an increase in the lows of the RSI, so maybe time for a bit of a reversal.
Looking at the specific USDCAD market though, this definitely looks oversold!
Source: FxPro MT5
Don't get me wrong, I still like USD short positions, which is the reason why I'd play this on the crosses instead.
The CAD has moved a long way higher but the AUD hasn't really moved commensurately - which seems a bit odd when we look at 2y government bond differentials below where we see a very sharp and sudden convergence in the last few days.
CENTRAL BANKS:
The RBA:
OK, so the RBA is still one of the more dovish central banks as inflation in Australia hasn't been quite as persistent as what we have seen elsewhere with a prior reading at 3%. Consequently, pricing for AUD rate hikes isn't as severe as elsewhere.
1y IRS is priced at 48bps, and the RBA is at 10bps now, so this would imply a couple of hikes a year from now - this is rich compared to what the RBA is pricing for, but I wouldn't be surprised to see a quick end to QE at the next meeting in February and a slight shift to a more hawkish narrative - despite surging Covid cases in Australia.
The BoC - The Crux of the Matter!
This really is why I'm putting this trade on now - we have the BoC meeting on 26 Jan (3pm UKT) and this will be very interesting. The market is pricing in a hike at 80% probability! I have been very vocal in pushing back against this notion, and for me the balance of risks is definitely to the downside for the CAD. Unwinding an 80% probability of a hike if they don't hike should be pretty significant for the currency, and AUDCAD will likely move considerably higher.
More than this, the expectation is for around 150bps of BoC hikes this year!!!!!!! Really? Do we believe this? Is the BoC really going to outpace the Fed by around 50bps. I suspect not... rather I would expect a gradual hiking cycle where response functions are analysed carefully to avoid spooking markets too greatly.
The key from the meeting will be the guidance - if the BoC does hike, but says from now on we go quarterly then this will disappoint the market.
Thus, it seems highly unlikely to me that the BoC will meet the markets expectations for hawkishness in January. I don't expect them to be fully clear on the hiking timeline, and this will disappoint the market - expect more clarity in the March meeting.
The above article could be an interesting read for those who expect BoC hikes and hawkishness.
SUMMARY:
I see two key catalysts in the next month. 1) The BoC is likely to disappoint market expectations for extreme hawkishness. 2) The RBA risk is to a more hawkish stance - particularity if they are no longer worried about COVID given Omicron appears less dangerous.
Thus, the trade for me is to get long AUDCAD - that way you keep the pesky USD out of the equation as well.
Please do reach out with questions.
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