AUD/CAD is testing key resistance on the weekly chart at 0.9762 – the 38.2% retracement of the 14.4% fall in April to August.
A closing break of this level is something we will monitor and effectively could lead to a continuation rally to the 50% retracement of this move at 0.9944. The only thing that stands out and holds us back from looking at long positions on any closing break of this retracement is the weekly MACD. It is still firmly below zero and therefore we feel bears could be happy to hold short positions around current levels, with stops at 0.9775 (just above the 38.2% retracement level).
Daily stochastic’s have come off oversold levels and this will certainly please those traders holding shorts from current levels. Ultimately there has been a huge position adjustment after the strong rally from the July lows of 0.9171, similar to what we have seen in AUD/USD. The question we need to ask is whether this has further legs or has the adjustment run its course?
Fundamentally, while the CAD is seen as the close proxy of the US economy of all the commodity currencies, the sentiment towards China is probably more positive. This is because its data releases have shown greater improvement than that of the US of late. As we know, the AUD is seen as the G10 proxy of the Chinese economy, given 35% of exports from Australia make their way there.
The concern we have is the market has done a good job pricing in a 7.6% growth rate in China this year, but probably hasn’t adjusted to China growing closer around 7.4% in 2014. The Chinese are expected to alter their growth target for 2014 to 7% and could talk about this in its November conference. The RBA is also likely to join the likes of the ECB in expressing concern about the recent bounce in the domestic currency and although commodities are generally firmer, they would still like a lower AUD on a trade-weighted basis. We favour the shorts camp here, although we don’t want to go against the short-term trend. We are happy to wait for a lower low and let price be the guide.