The recent rally in the AUD has been based on optimism about the Chinese economy recovering as COVID restrictions are relaxed and also a weaker USD which has also helped to push the AUD to the upside as Goldman Sachs note:
“CAD has had a solid performance this year on the BoC's aggressive hiking cycle but has underperformed the rest of G10 recently. This is mostly related to lower oil prices and lower yields (and a weaker USD on crosses). However, CAD on crosses remains our preferred expression in an environment of USD strength, which we expect to persist over the next 3 to 6 months." (GOLDMAN SACHS)
We expect the USD to firm up and this is bearish for AUD/CAD. In terms of China:
“USD/CNY is trading below 7.00 for the first time since September, with the Yuan following Chinese risk assets higher after the government announced an easing of Covid rules. The government’s move appears to be a direct consequence of recent demonstrations against its Covid policy, but a further untightening of restrictions may prove complicated. At the same time, the real estate and export sectors remain a key concern for the medium outlook in China, and one that may prevent the Yuan from appreciating much further.” (INGTHINK)
The AUD is correlated with Yuan strength and weakness – we are looking for the USD to gain upside traction on the CNH which is bearish for AUD/CAD.
Going forward we expect the CAD to hold up better than the AUD due to its exposure to the US economy which is doing better than China and also its heavy exposure to energy exports which we expect to hold up better than Australia’s hard exports such as iron ore.
Speculators are too bearish on the USD and to bullish on China which has seen AUD/ CAD Move to a bullish extreme and we expect it to end.
On the monthly chart below we can see resistance at 0.9200 and if it holds and we break support at 0.9100, we expect a major sell-off to the downside. On the daily chart our views on entry, stop, and targets.