Market Analysis

Commonwealth Games

It’s that time of the year when banks put forward their ideas for 2018. Out of the blocks on Tuesday was Dutch bank ING, and one of their ideas was for a firming of the Canadian dollar versus the Aussie dollar next year (AUDCAD). ING’s notion is to fade short AUDCAD entering half the trade at 0.9700 and the other half at 0.9800, targeting 0.9200 but with a stop at 0.9930. Traders can make up their own minds about the validity of that idea and the levels cited but even those who disagree with the Dutch bank’s view might be interested to hear ING’s underlying logic, as the logic could be applied separately to AUDUSD or USDCAD. While acknowledging NAFTA-related risks to the CAD, ING argues that, compared to the Mexican peso (USDMXN), the Canadian dollar, often referred to as the Loonie, hasn’t been that sensitive to NAFTA-renegotiation headlines and notes “ongoing Canadian economic outperformance.”

Additionally, it is the Dutch bank’s contention that while the Bank of Canada (BOC) has commenced policy tightening and may continue, the Reserve Bank of Australia will be a laggard in this respect, which could work in the CAD’s favor versus the AUD. Meanwhile, in the commodity space, ING argues that BOC policy is currently the chief driver of the CAD, leaving the Loonie less susceptible to any drift lower in the price of crude, but that the AUD would still be vulnerable if demand for iron ore slipped. Whether traders see value in this Commonwealth game remains to be seen.

Written by Neal Kimberley, External Currency Analyst.