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AUDCAD Analysis (Aug, 2021) Recession coming?!

Australia one of the countries around the world to have had a care free view of the pandemic. Starting off by closing borders they were able to keep infections extremely low and even have zero infections. The pandemic has had a lagging effect on Australia as increasing infections are now affecting Aussies who don't have a high vaccination rate.

Lockdowns are now hitting the country across multiple areas with retail sales plunging, businesses closing down and consumers told to stay inside.

Australia is potentially hitting a double dip recession.

That in mind there are various opportunities we can assess on the Australian dollar.

Logikfx Technology Summary

Overall, the Logikfx technology summary is showing promising bearish signs ahead for September 2021. This is no surprise considering the recessionary pressures of lockdowns and infections rising which are overwhelming they Australian economy and medical departments.

The 4 main economic indicators which are assess are:

  1. Macro Currency Strength Meter

  2. GDP Differentials Indicator

  3. Interest Rate Differentials Indicator

  4. Hedge Fund Positioning

Currently, they are all showing or heading towards a bearish outlook which means we should be looking for bearish positions when trading AUDCAD.

Macro Currency Strength Meter

The macro currency strength meter helps gauge and analyse hundreds of economic reports into an easy to digest indicator. What we're looking at right now is that the past month the Australian Dollar has had bearish economic data stacking against it but the Canadian dollar has had bullish economic data in favour.

This overall means as trades we should be bearish AUD and bullish CAD which in an exchange rate equates to being bearish AUDCAD.

Gross Domestic Product Differentials

The GDP differentials indicator shows the total output of each country selected. In this case we're comparing the GDP growth rates against Australia and Canada. What we can find from the indicator is that the GDP growth rates in Australia are forecast to slow down in comparison to Canada.

This creates a bearish outlook on AUDCAD moving into 2022 which agrees with the overall bearish directional bias we got from the currency strength meter.

Trade Analysis (Imports/Exports)

Australia is a mineral and commodity rich country which exports various materials such as Coal and Iron ore which is why we've identified these as two main commodities to analyse. WTI crude oil is a major export in Canada which is why we've added this within the analysis to gauge the correlation of their exports vs the exchange rate and assess whether these trends are to continue.

AAL Coal is a mining company with various operations within Australia. We've identified a slight positive correlation between AAL and AUDCAD which suggests as AAL prices rise AUDCAD follows.

The AAL prices have been on a sharp bullish run the past 5 years but has now high highs seen in 2010 which saw AAL drop for the next 5 years. If this same trend is to continue AUDCAD may be in for a long-term bearish move.

Iron ore is another raw commodity that Australia exports, this has a much stronger correlation against AUDCAD sitting at 25%. This means 25% of the time as Iron ore prices fell AUDCAD fell too.

The most recent data has seen iron ore prices take a steep drop with overall lockdowns having a huge effect on workers being able to get to work, supply chain issues and a fall in overall demand.

WTI mentioned earlier is crude oil prices which is a major export in Canada. No surprise here is that there's an incredibly strong correlation between AUDCAD and WTI, 50% positive correlation.

This currency correlation shows that the recent dip in WTI prices may be a bearish sign that AUDCAD will continue it's downwards trajectory as we move towards 2022 and Q4 of 2021.

Overall, it's not looking great for Australia as economists have forecast another recession soon.

Interest rate differentials