Soft inflation, dovish RBA keeps Aussie weak

Expectation of a change in stance to hawkish by the RBA had kept the Aussie bullish against the Canadian dollar for the most part of July. The Australian dollar’s rally against the Loonie was also favored by the weakness in the price of crude oil and a recovery in the iron ore prices to $70 per ton.

However, we expect the situation to change in the week ahead due to the facts discussed underneath.

The GDP data for May, reported by Statistics Canada, justified the recent rate hike by the Bank of Canada.

The economy expanded 0.6%, compared to 0.2% in the previous month, and higher than analysts’ expectations of 0.2% growth. 14 out of 20 industrial sectors performed well. While goods producing industries grew 1.6%, service-based industries grew 0.2%. It was the seventh consecutive monthly increase. The upbeat GDP growth figure has spurred speculation of another rate hike. Avery Shenfeld, an economist at CIBC Capital Markets, stated that any upward revision to growth forecast would trigger another rally in the Canadian dollar.

Last month, the Aussie rallied 4% against the US dollar and 3.16% against the Pound. Even against the Euro, the Australian dollar advanced 1.84%. However, analysts believe that the current strength of the Aussie could have a negative impact on the exports. Thus, RBA will not be inclined to raise interest rates at this point in time. The argument is also supported by a mere 0.2% q-o-q rise in the consumer prices in the June quarter, compared with a 0.5% increase in the March quarter, and lower than the Wall Street estimates of 0.4% increase. Even the annualized inflation had declined to 1.9%, versus market’s expectation of 2.2% reading, and below the 2% level targeted by the Reserve bank of Australia.

RBA Governor Lowe Pointed out that a low wage growth of 2% will not enable Australia to reach the inflation target of 2.5%. In a speech given to the Anika Foundation, Lowe stated that he is not under pressure to raise the interest rates. Lowe also dismissed the possibility of an increase in wage growth in a short span of time. Thus, fundamentals favor the AUD/CAD pair to remain in a declining note.

The AUD/CAD price chart indicates resistance for the pair at 0.9990. Additionally, the declining stochastic oscillator confirms the loss of momentum. The on balance volume indicator is making new lows. Thus, we can expect the currency cross to remain in a declining path.

A short position would be ideal to gain from the forecasted downtrend of the AUD/CAD pair. We wish to open the short position near 0.9940, with a stop loss order above 1.0040. The take profit order would be placed near the next major support level of 0.9780.

To establish a similar setup in the binary market, we would like to invest in a put option when the pair trades at about 0.9940. A contract which expires on or around August 8th would be chosen by us.