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Trading AUD and CAD Post-Rate Hike

June 8, 2023
Frank Cabibi

Two surprises occurred this week from both central banks of Australia and Canada. Economists forecasted an unchanged discount rate, but the banks had other plans in mind. This caused a heavy positive move for AUD and CAD after reaction to the news. Here is what we are looking for in these types of pairs going into the end of the week.

EdgeFinder Analysis

CADJPY is now at a buy rating on the EdgeFinder at +4. This is a mild bullish signal as we near the end of the week. This score will likely change starting next week however, as the BOC remains more hawkish than the yen's BOJ. The uptick in CAD inflation caused some concerns in the overall currency strength, so the central bank acted accordingly.

The two countries have similar GDP growth, but it's also important to look at monetary policy. Canada has been stringent against the concerningly high inflation levels. As a result, those levels are falling, unlike in Japan. Japan's GDP is on the rise due to ultra-low interest rates, but so is their CPI. On the other hand, CAD is seeing an overall decline in CPI while experiencing economic expansion.

Despite EF readings, this pair is hovering on a strong support level on the 1D timeframe. EURAUD is hovering at a mild sell rating at -4, however, we might see a shift in sentiment. Weighing down the score is trend readings and 10-year average seasonality. A bounce from this trend line would indicate a possible uptrend in the works and could shift the score back to a neutral rating.

However, a break below this trend line would suggest a stronger downtrend in the works. Yesterday's candle closed with buying pressure as the market wasn't quite ready to dump this pair. What investors might be looking at now is monetary sentiment from AUD and EUR. AUD just had their rate hiked by 25 bp and stated that another hike is very possible somewhere down the road.

We can keep this in mind for the remainder of this month and July as analysts are looking to see a pause. Now we have news on the ECB coming out next week in which could result in another rate hike. If their bank decides to hike, we could be looking at hard upside. If they decide to pause, this pair will probably move to lower levels.

If we put AUD and CAD against each other, the EdgeFinder will prefer the CAD. Although both currencies saw a surprise rate hike, CAD looks to be in a better economic condition overall. This is due to the fact that GDP is rising at a quicker rate as well as experiencing much lower inflation than its Australian counterpart.

Retail is pretty much mixed as well as COT. According to short term interest rate forecasts, CAD is likely to stay at higher rates for longer, thus making it the more hawkish of the two. We also saw an increase in the number of long contracts for the Canadian dollar whereas the Aussie reported more mixed numbers from both bulls and bears.

Retail Spotlight

Taking a look at the retail side of things, some things to look at are that sentiment is all over the place. Notable pairs like NZDCAD and AUDNZD suggest an overall bullish sentiment for the kiwi. The crowd is also short CAD for the most part.

Smart Money Spotlight

Institutional sentiment is less mixed as they could be showing a shift. EUR became less bullish, AUD saw a slight increase in net longs, CAD saw a major increase in bullish favor, and gold looks increasingly bullish. A large increase for the Canadian dollar should be considered into the AUDCAD analysis as well. CAD looks favored overall by smart money.

Fundamental Spotlight

Reiterating an earlier topic, CAD's short term rates are projected to be higher for longer than AUD's. This is important when comparing the level of hawkishness for both currencies. Judging by these forecasts (CAD interest rate in top left, AUD interest rate on the bottom left) CAD looks stronger from a monetary perspective.

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