AUD Expected to Recover vs. Canadian Dollar

After a rough month, the Australian Dollar may be finally on the path to recovery versus its counterparts, as the release of better than expected economic data in the U.S and Australia seem to have revived demand for riskier assets and higher yielding currencies. It appears that the crisis in Europe hasn’t had an impact on the south pacific economy and the AUD is expected to recover along with a rebound in equities and commodities.

The AUD was down earlier this week as the Reserve Bank of Australia (RBA) kept interest rates unchanged for the first time in 4 months to assess the impact of the recent monetary tightening on consumer and business demand, which showed signs of slowing. Nevertheless, RBA Governor Glenn Stevens stated in the accompanying statement that monetary policy is “appropriate for the near term,” signaling there is room for a resumption of interest-rate increases as the economy strengthens.

One sign this indeed may be the case was the release of the Australian trade balance which swung to a surplus in April as exports of iron ore and coal shipments surged. Australian exports surged by the most in almost three decades in April, boosted by shipments of iron ore and coal to China, and pushing the trade balance to a surplus for the first time in 12 months.

The unexpected result boosted economists’ expectations that the hikes in interest rate are likely to resume in the near future as Australian economic expansion is forecast by the RBA to almost double in the next two years, with exports and investments in the mining sector providing the biggest push to growth. The nation’s proximity to China and its wealth of natural resources are likely to sustain a vast economic expansion.

The Canadian economy has been performing well in the wake of global economic recovery and the Australian Dollar benefits from the rise in commodity prices, particularly Oil, as they are both commodity-linked assets. The AUD’s edge over the CAD, however, is the much higher interest rate which makes the currency more attractive to investors.

While the Bank of Canada (BOC) began the process of monetary tightening and raising the interest rates this week from an all time low, it remains much more cautious than the RBA and will likely lag behind in its progress. Currently the interest rate in Australia is 4.50% compared with 0.50% in Canada.

Technical Analysis
After a long and steep decline versus the Canadian Dollar, the Aussie may see a rebound against the CAD as evident from the chart below.

- Point 1 shows that there is a breach of the lower Bollinger Band, indicating that the downward movement was exaggerated and an upward correction is expected.

- Point 2 shows that the RSI for the pair has been floating in the oversold territory, indicating an imminent upward movement may take place.

- Furthermore, if one looks at the MACD a bullish cross can be expected as it almost at the lower border.

AUD/CAD Weekly Chart

click to enlarge

Disclosure: No positions