Trade Idea: SELL AUD-CAD

Hello All,

I decided to write on a couple of currencies I don't usually focus on today, and it's largely based on the rather juicy trend line below, but backed up by solid fundamental reasoning. 

SELL AUDCAD at 0.923, TP at 0.899, SL at 0.933. 

Source: cTrader FXPro 

You can see we have this quite nice downward channel and we are back up at the high points of that channel once again. It's not perfect, but I'm confident enough in it to give this trade a try, and also since it's a nice channel we can get a good risk/reward and have tight SLs to minimise losses. 

The Fundamental Backdrop: 

Obviously we are now living in an FX world driven by interest rate differentials. Canada has been one of the most interesting to watch in the central bank debate, originally one of the hawks, and now one of the doves. Meanwhile, Australia is undergoing the opposite pivot - originally having no hikes pencilled for a few years, and now quickly swapping into a much more hawkish narrative. 

The quote following the CPI release was that the BoC would be "nimble, and if necessary, forceful in using monetary policy tools to address whatever situation arises". 

On the other hand, in Australia, inflation is not quite so high, and there have been rumblings recently that the RBA is not as concerned as some may initially have expected. Wage data recently released showed an increase of just 2.5% for some sectors, and the RBA has been clear it would like to see 3% wage increases. Then when you add in the reopening of Australia's borders to internationals, this could further ease any labour market pressures. 

The chart above shows the yield differentials between AU and CA and then the AUDCAD rate. We can see a clear relationship between higher AU differentials and higher AUDCAD. What I find interesting is the rapid spike in AU-CA 10y yields, and how AUDCAD has also climbed. 

With the above monetary policy changes above I expect, this move could reverse and then we'd have another driver for lower AUDCAD. 

Central Bank Meetings: 

Always an important question is the one on timing. 

The next BoC meeting is the 2nd March. 

The next RBA meeting is the 1st March. 

If we see a much more hawkish RBA, then it will immediately be time to throw in the towel on this trade, but I don't expect this and would rather prefer to play the likelihood of more dovish talk from the RBA. Likewise, if the BoC comes out more dovish it's also time to throw in the towel. 

All-in-all, I like this sell AUDCAD idea on monetary policy divergence and that rather forceful trend channel in the first chart. Other technical indicators like RSI are also flashing overbought for the pair, and this is a relatively low risk trade where you can be flexible with stops to suit your own risk preferences. 

SELL AUDCAD at 0.923, TP at 0.899, SL at 0.933.