AUD/CAD has stalled beneath a pivotal zone of resistance as we approach the BoC policy meeting and Australian employment report. If we are to see a divergent theme materialize between the two events, we’d could expect price to provide a decisive break or firm rejection of this resistance area. As a break higher would place the cross within new trading range, it may provide tradable opportunities for bulls if conditions allow.
Expectations for BoC to hike this week are above 80% by some estimates, so it will likely require more than a hike for CAD to extend gains by any meaningful amount. Indeed, whilst the pickup of economic activity and leading indicators likely warrant a hike, we question BoC’s willingness to signal further hikes on Wednesday due to the time it can take for policy changes to be felt by the economy. In late November they reiterated this can take “six to eight” quarters and, as this could be their third hike this cycle (within seven months), BoC could signal another form of tightening.
Their December OCR statement highlighted that BoC are “increasingly confident” the economy will require less stimulus over time, which places tapering onto the radar. Any hint of further tightening, whether it be a hike or to reduce their balance sheet will likely prove to be a bullish story for CAD, but tapering may be the more likely of the two. Conversely, if such clues are not presented along with the expected hike, the session could quickly turn bearish (particularly if they don’t hike at all). Therefor it becomes a question of how hawkish their statement or press conference is perceived to be, as to how CAD performs on the day. And where AUD/CAD is concerned, focus would then shift to Australia’s employment report.
Australia has enjoyed a solid run of decent employment figures, which are proving to be the more sympathetic to RBA’s forecasting abilities when compared their inflation ones. Whilst a hike from RBA still seems far away, a positive employment report could be the icing on the cake for AUDCAD bulls if we see a dovish hike from BoC. And whilst a weak employment set is not likely to radically alter RBA’s policy, it would make the upcoming quarterly inflation figures and Feb’s RBA meeting of greater significance. It could also keep AUD/CAD beneath resistance if BoC’s was a dovish hike.
Technically AUD/CAD is making a constructively bullish case that a longer-term basing pattern is unfolding. Since September, the cross has tried to carve out an inverted head & shoulders pattern and now resides just beneath the neckline around 0.9900/25. A decisive break of resistance opens up a potential run for the 1.0074 high, whereas a firm rejection keeps it back within range (and on the backburner).
Clues that bullish momentum is building can be seen on the RSI. The price troughs of the ‘left shoulder’ and ‘head’ coincide with bullish divergences, and RSI also managed to breakout to new highs ahead of price. Whilst momentum can at time lead price action, we still need price action to confirm these bullish clues. And as a price characteristic of crosses like AUD/CAD can be choppy in nature, we’d need to be confident it was a decisive break before seeking bullish setups after a period of consolidation, or low volatility retracement.