FxWirePro: Review and Prospects of Commodity-Driven FX Bloc After RBA and BoC

Both the Aussie and the Lonnie came under stress with the resultant effects of increasing rate cut speculation as in both countries the economy is doing much worse than previously anticipated. The Australian GDP growth in Q4 was considerably lower than the consensus of the market, the central bank that makes a downward revision on the part of the Reserve Bank of Australia now inevitable.

While the Canadian central bank (Bank of Canada, BoC) already reacted to the weakened growth momentum yesterday by removing the prospect of further rate hikes from its monetary policy statement. Instead, it now leaves its options open. However, yesterday’s changes do not have to mean that all rate hikes are now totally off the agenda. It is, however, imagine that the BoC will now consider a much smaller extent of rate hikes to be necessary. 

There is a difference between whether it merely postpones rate hikes as it considers continued low levels of interest rates necessary to support the economy or whether it expects interest rate levels to peak at lower levels in this rate cycle. The latter would be significantly more negative for the Canadian dollar. 

The policy repricing and FX move across G10 and assess as to how much of the policy repricing has been appropriate, where it’s perhaps gone too far versus what still needs to catch up. The pair has been sliding from the December peaks of 0.9775 levels with the mounting bearish sentiments, currently trading at the 0.9452 levels. We could foresee some downside traction in the weeks to come.

Hence, at spot reference: 0.9452 levels, we advise staying short in mid-month futures contracts on hedging grounds with a view to arrest the southward targets of another 200 - 300 pips, but maintain a strict stop loss of 0.9637 levels. Courtesy: Commerzbank

Currency Strength Index: FxWirePro's hourly AUD spot index is flashing -54 (which is bearish), while hourly CAD spot index was at -111 levels (bearish) at 11:45 GMT.

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