AUD/CAD Trading Strategy – Bearish Setup on the Horizon?
- Canadian Dollar may resume gains against AUD on fundamental and technical arguments
- BoC is relatively more hawkish than the RBA, meanwhile crude oil price declines may slow
- AUD/CAD may fall as resistance holds, perhaps offering an attractive selling opportunity
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Fundamental AUD/CAD Bearish Argument
The Canadian Dollar has been losing ground against the Australian Dollar for over a month, but there are a couple of fundamental and technical arguments as to why that may turnaround. In recent weeks, the drive higher in AUD/CAD seems to have been a combination of improving market mood as well as a significant drop in crude oil prices. More declines in latter could push the pair higher and poses as a risk to this argument.
Oil has been under pressure lately amidst increased output from the United States and OPEC nations. Furthermore, the US has also excluding key nations from its reinstatement of sanctions on Iran. For Canada, lower crude oil prices can adversely impact revenues given that it is a major export. Thus, CAD can at times closely follow the commodity given its possible implications for BoC monetary policy bets.
Speaking of, the Bank of Canada is much more hawkish than its Australian counterpart (the RBA). This has largely been the case this year as the BoC kept raising rates while the RBA left theirs unchanged. Now, CAD enjoys a yield advantage against AUD by 25 basis points and that spread may very well increase in the not too distant future.
In FX, the direction of where interest rates are going are arguably the most significant determent of what moves currencies will make next. Looking at the chart below, AUD/CAD tends to more closely follow the spread between Australian and Canadian government bond yields than it does with oil prices. It’s an inverse relationship with the commodity given that CAD is the counter currency.
Chart created in TradingView
With that in mind, overnight index swaps are pricing in an 80% chance of a BoC rate hike in January 2019. In Australia, we don’t approach the same odds until towards the end of next year. This may perhaps be why we haven’t seen such a dramatic widening of the spread between Australian and Canadian front-end government bond yields.
Thus, from a monetary policy perspective, recent gains in AUD/CAD could be corrective as the dominant fundamental themes reinstates themselves. Furthermore, reports crossed the wires November 7th that OPEC countries will be discussing output cuts for 2019. Thus, oil’s scope for more weakness may now be suppressed in the interim.
AUD/CAD Technical Analysis
From a technical perspective, this has AUD/CAD in a rather interesting position for a potential bearish reversal in the near-term. On the daily chart, multiple falling trend lines have now been broken which are bullish signals. The dominant downtrend in AUD/CAD seen since March may very well be over. But, it is now facing critical resistance barriers composing of December 2016/2017 lows and the May 2018 low (0.95548 – 0.96028).
AUD/CAD Daily Chart
Chart created in TradingView
Zooming in on the 4-hour AUD/CAD chart shows that amidst its aggressive push higher, negative RSI divergence is present. This reveals that upside momentum is fading which may precede a bearish reversal if the fundamentals noted earlier sink the pair. With that in mind, it may be possible that resistance holds and we get a turn lower. This would expose near-term rising support lines which if broken, may see the dominant downtrend resume.
If these technical bearish reversal signs bear any fruit, it could open the door to an attractive AUD/CAD short perhaps targeting 0.93266 and then 0.91827. But until that is achieved (or if), I will be standing aside to watch how price action unfolds ahead. You may follow me on twitter @ddubrovskyFX for updates to this setup.
AUD/CAD 4-Hour Chart
Chart created in TradingView
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— Written by Daniel Dubrovsky, Junior Currency Analyst for DailyFX.com
To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter
Traders Net-Short Are 63.3% Higher from Last Week
TRADERS REMAIN NET-SHORT
US 500: Retail trader data shows 24.6% of traders are net-long with the ratio of traders short to long at 3.07 to 1. In fact, traders have remained net-short since Jan 07 when US 500 traded near 2473.53; price has moved 11.9% higher since then. The number of traders net-long is 1.7% higher than yesterday and 1.6% lower from last week, while the number of traders net-short is 5.2% higher than yesterday and 63.3% higher from last week.
For more in-depth analysis, check out the Q1 2019 Forecast for Equities
S&P 500 SUGGESTS STRONG BULLISH BIAS
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests US 500 prices may continue to rise. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger US 500-bullish contrarian trading bias.
— Written by Nancy Pakbaz, CFA, DailyFX Research
Follow Nancy on Twitter @NancyPakbazFX
On to the Next Big Levels of Resistance
S&P 500/Dow Jones/Nasdaq 100 Technical Highlights:
- S&P 500 nearing 2800-area, several swing-highs from last year
- Dow Jones 26k-ish stands between it and record highs
- Nasdaq 100 trading around resistance already
Check out the forecasts for Global Stock Indices and other markets on the Trading Guides page.
S&P 500 nearing 2800-area, several swing-highs from last year
The S&P 500 is continuing to show impressive strength since its v-bottom began the day after Christmas, with it having a few points along the way where it could have been stopped in its tracks. But it wasn’t, and this has levels prior to the December swoon in view. The area surrounding 2800 is a big one.
From 2800 up to 2817 there were three peaks created from failed rallies, a logical area, with the rally having come this far, to look for stocks to weaken from. Watching price action will be key, as always, but especially around the levels just ahead.
While resistance looks likely to get tested soon, the upward channel structure over the past month will keep stocks pointed higher for as long as it holds. If the S&P is rejected off resistance, to further bolster the notion of a sizable retracement we’ll need to see the underside parallel undermined.
For now, the top-side must be respected, but the time for material weakness may be nearing…
Stocks are rallying, but will it last in the long-term? Find out where our analysts see stocks headed in the Global Equities Forecast.
S&P 500 Daily Chart (2800/817 big spot)
Dow Jones 26k-ish stands between it and record highs
The Dow is nearing the 26k-area, a spot which is basically the equivalent of what 2800 is to the S&P 500. The zone runs up to near 26300. The focus is primarily on the S&P right now as it is the broader index, but depending on how price action plays out, the Dow may be the better index to short at some point if it shows relative weakness to the broader market.
Dow Daily Chart (26k-ish stands in the way)
Nasdaq 100 trading around resistance already
The Nasdaq 100 continues to lag behind, which is something to continue monitor given it was the bull-market leader with its leading group of stocks – FAANG – dominating price action and sentiment. The NDX is trading around the 200-day and near late-year swing highs equivalent to the ones discussed with regard to the S&P 500 and Dow. So far, relative weakness is making the 100 the preferred fade if the S&P finds material selling off resistance surrounding 2800/17.
Nasdaq 100 Daily Chart (trading around resistance)
To learn more about U.S. indices, check out “The Difference between Dow, Nasdaq, and S&P 500: Major Facts & Opportunities.” You can join me every Wednesday at 10 GMT for live analysis on equity indices and commodities, and for the remaining roster of live events, check out the webinar calendar.
Tools for Forex & CFD Traders
Whether you are a beginning or experienced trader, DailyFX has several resources available to help you; indicator for tracking trader sentiment, quarterly trading forecasts, analytical and educational webinars held daily, trading guides to help you improve trading performance, and one specifically for those who are new to forex.
—Written by Paul Robinson, Market Analyst
You can follow Paul on Twitter at @PaulRobinsonFX
Aussie Dollar Falls on RBA Minutes, US-China Trade Talks Eyed
TALKING POINTS – AUSSIE DOLLAR, RBA MINUTES, ZEW, TRADE WARS, CHINA
- Aussie Dollar, commodity bloc FX down on downbeat RBA meeting minutes
- Germany’s ZEW survey may compound worries about slowing global growth
- Trade wars in focus on US-China negotiations, fears of US auto tariff hike
The sentiment-linked Australian, Canadian and New Zealand Dollars weakened in otherwise quiet Asia Pacific trade. The move appeared to be inspired by an ominous tone in minutes from February’s RBA policy meeting. Meanwhile, the US Dollar corrected gently higher.
RBA officials cited “significant uncertainties”, noting that trade tensions and cooling domestic demand have increased negative knock-on risks from China. They added that consumption may fall if domestic house prices fall much further. They suffered the worst drop since 1983 in the three months through January.
TRADE WAR DEVELOPMENTS, GERMAN ZEW DATA MENACE MARKETS
Looking ahead, Germany’s ZEW survey of analyst sentiment may compound the downbeat mood, especially if it echoes the disappointing trend in regional data outcomes since September. A small improvement in the forward-looking Expectations index is nevertheless expected to keep it within a hair of six-year lows.
The tone of US-China trade negotiations may also be formative as a delegation from Beijing arrives in the US for continued talks. Both sides painted a rosy picture earlier in the week, but the Trump administration may be preparing a spoiler as the President ponders raising auto import tariffs.
What are we trading? See the DailyFX team’s top trade ideas for 2019 and find out!
ASIA PACIFIC TRADING SESSION
EUROPEAN TRADING SESSION
** All times listed in GMT. See the full economic calendar here.
FX TRADING RESOURCES
— Written by Ilya Spivak, Currency Strategist for DailyFX.com
To contact Ilya, use the comments section below or @IlyaSpivak on Twitter
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