AUD/CAD Probes Key Support Ahead of BoC Rate Decision

Starting with the bigger picture, there are several forces that are weighing on AUD/CAD.

• Yield differentials: RBA have cut rates to 1% versus the Bank of Canada’s 1.75%. Moreover, further cuts from RBA are expected while BoC remain neutral.
• This is seeing the AU-CA 2 and 10-year differentials point decisively lower, dragging the cross down with them.
• Canada’s economic data is on a tear while, overall, Australia’s data continues to underwhelm. We can see on the CESI chart (Citi Economic Surprise Index) that Canada’s data is beating expectations by a wide margin. That said, the CAD CESI is over +2 standard deviations from its long-term average so potentially at risk of a reversing but, for now, continues to outperform the consensus one the less.
• Large speculators have switched to net-long on CAD futures and remain overwhelmingly short on AUD futures.
• • The daily structure is clearly bearish, and the prior two corrections having respected 50% and 38.2% retracement levels, respectively. The 20-day eMA is also capping as resistance.
  • A break below 0.9100 appears likely at this stage, although we remain bearish below 0.9207.
  • Next major support levels are not until the July and June 2010 lows at 08873 and 0.8584, respectively. So we’d seek to trail a stop with an open target towards these.
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    Technically, AUD/CAD sits at a critical juncture, just above the 2018 low.

  Keep in mind the BoC meeting is tomorrow, which leaves CAD crosses prone to bouts of volatility. However, while BoC are expected to hold, we’d expect a slightly hawkish statement if they veer away from neutral, given the pick-up with inflation and data in general. If so, this should provide another pillar of strength for the Canadian dollar.