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:
Macro Currency Strength Meter
GDP Differentials Indicator
Interest Rate Differentials Indicator
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
The interest rate differential indicator is a great sign of hot money flow between currencies and countries. It shows how investors may prefer to hold currencies with higher interest rates so that they can earn interest on their base currency.
In this case we can see that the interest rates are incredibly low after the pandemic as monetary authority has used the interest rates as a lever to stimulate the economy through lower lending costs, this pumps more money into the economy more easily.
What the indicator is telling us now is that Australia has lower interest rates than Canada by a fraction which overall shows investors would prefer to hold Canadian dollars over Australia Dollars.
This is bearish and agrees with the overall analysis to be bearish AUDCAD.
Stock Market Analysis (S&P/ASX200)
The Australian stock market is generally referred to as the ASX200 which is an index of the top 200 companies in Australia. What we're seeing overall is fairly bullish signs since 2020 however prices have actually dipped slightly since the most recent highs which could be an early sign of a bear market or a correction.
This slight dip is interesting as we can consider it as currently slightly bearish which agrees with the AUDCAD bearish outlook.
Hedge Fund Positions
The hedge funds are some of the biggest speculators in the markets which are looking to make money based on shorting or longing financial instruments.
What we're seeing on the COTA indicator is that hedge funds has started to sell off their long positions in the past month. The downward trajectory of AUD shows that hedge funds no longer want that many long positions.
If the blue solid line falls below zero on the chart we can have confidence that hedge funds are fully committed to selling the AUD.
Currently, the differentials between the open interest of hedge fund positions shows us traders that we should be looking at bearish positions based on market sentiment. This way we won't be trading against big money but with it.
Price trends
Overall the price trends we can see the bearish movement across AUDCAD in the past 5 years. If you tried to buy AUDCAD as a trader in this period you would have been stopped out a lot more than if you were looking for sells.
In the current situation traders have sold AUDCAD meeting at the third point of the long term trend.
Prices are now congesting which may see prices pullback again before falling further.
Overall, sellers have already confirmed and committed capital which means we are fairly confident of the bearish move in AUDCAD to continue over to 2022.
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