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Transferring AUD to CAD? - brief thoughts on this pair

Written by Sam Coxhead on August 4th, 2011.      0 comments

9:25 AM (NZT) The volatility continues in the global markets and the AUD has seen further pressure. On Tuesday the RBA kept the cash rate unchanged at 4.75%, and this was in the face of the higher than expected inflation number last week. Although there was limited impact to the AUD initially, as the day wore on the interest rate market started to price higher chances of an easing before the end of the year and the AUD started to follow the lead.
Yesterdays Retail Sales number was weaker than expected and this added some further fuel to the AUD weakness. The numbers was -.1% vs an expectation of a +.4% increase in activity on the month.
In the international back drop there has been a further move in bias towards risk aversion, especially earlier on in the week. The focus has shifted back to Europe from the US, as now Italy and Spain are in the spotlight. In the coming weeks and months we are likely to see the risk aversion remain.
In Australia on Friday the RBA gets to release their quarterly Monetary Policy Statement and this will be very closely watched. Whilst the foreign exchange markets have been volatile, the real carnage has been in the interest rate markets. Before the cash rate decision on Tuesday the market had priced a small chance of the hike in the cash rate from the RBA. Since then there has been a rapid move towards pricing in easing’s to the cash rate, and this has seen wholesale interest rates over the next six months drop by around 50points , indicating the market expectation for a similar drop in the cash rate. Hence why the Statement from the RBA is so important.
The Canadian economy has been somewhat out of the spotlight so far this week but this changes on Friday when employment numbers are released along with some construction and manufacturing releases.
In terms of what the exchange rate has done, it has had a range so far on the week of 1.0534 down to 1.0270 and the current interbank rate is 1.0345. The bounce back has come in the offshore session overnight as US equity markets stablised after the sharp drops earlier in the week.
Given that we are still at historically elevated levels and the current wider market uncertainty, the risk may prove to be to the downside for the AUD on this cross. Support levels come in at 1.0270/1.0220 and then at the previous downside leg low of 1.0440. If we see the RBA clarify to the market that there remains a possibility of a hike due to the inflationary pressures, tests to the topside would come. Resistance levels are 1.0380, 1.0430 and then again higher up towards 1.0500.
Current levels still represent good value buying of CAD with AUD to my mind and this is obviously backed up when taking into account historical averages.