AUDCAD at a crossroad - Long

25 lug 2022

The pair is sitting below the 50 day SMA after clearing a trendline. I would like to see more action within this zone supporting a long trade considering that the zone also has a resistance level which the price broke to the downside in June.



Failure to break above this level will invalidate this idea. Therefore, the 0.86xxx and 0.83xx will come into focus

Fundamentally speaking, the AUD seems shielded from geopolitical impacts affecting Europe. Australia is expected to do better than other G10 countries as central banks rush to hike interest rates. In addition to this, weakness in the oil markets could lead to a weaker CAD. Oil markets are starting to price in a possibility of a global recession despite the tightness of the supply side the world is currently experiencing. Saudi Arabia has promised to increase supply into 2023 prompting oil prices to move lower

Risks to this play are as follows:

• AUD tends to follow risk sentiment in equities. Therefore, if the equity markets reprice lower in the event of a recession, this AUD strength is going to subside. My assumption is that equity markets have already priced in a global mild recession given that as the market is considered efficient (Efficient market hypothesis states that markets are efficient i.e. have already priced in all the available information in the public domain leaving no room for investors to make excess profits)
  
  
• Should oil prices remain elevated for longer, i.e. the futures curve reprices higher as time moves on, the CAD will remain relatively strong. This is the biggest risk to LONG play.
  
  
• Should the two above risks play out at the same time - a mild recession and higher energy prices, that would possibly push the AUDCAD pair lower towards the March 2020 Low pivot level.
  

It's important to understand the macro background in order to inform your decision on how to position for this play. However, I'm currently bullish on this pair unless risks come to fruition.