Short AUD/CAD: Q2 Top Trading Opportunities

AUD/CAD Q2 Forecast: Short AUD/CAD – A Return of US Exceptionalism

Much like my top trade for Q1 (CAD/CHF), which has generated a 7% return (at the time of writing), I will be sticking with the bullish theme for CAD. Heading into Q2, I am bearish on AUD/CAD on US economic outperformance, BoC tapering and favourable positioning.

A $1.9 trillion fiscal stimulus package has seen a whole host of economists revising higher US growth expectations, which should benefit the Canadian Dollar more so than the Aussie on spillover effects. This also ties into the Federal Reserve which will be looking towards applying the brakes on monetary policy stimulus as strong US data is recognised. This means that the dot plots may shift towards a 2023 hike at the June meeting. Meanwhile, the rally in global bond yields has raised concerns of a taper tantrum 2.0. Looking back at the first taper tantrum in 2013, AUD/CAD shorts performed well.

AUD/CAD vs. US10 Year Yield

Source: Refinitiv

The Bank of Canada is slowly beginning to head for the exit as crisis-fighting stimulus measures are closed, suggesting that the central bank could taper asset purchases from the current CAD 4bln/week as soon as April. In contrast, the RBA maintains the view that very significant monetary support will be needed for some time with the Governor stating that markets expectation of rate rises in 2022 and 2023 is not shared by the bank. This growing divergence is likely to weigh on AUD/CAD.

Looking at CFTC Commitment of Traders net speculative positioning figures, it seems the markets are slightly net long AUD/CAD, raising asymmetric risks on the downside for the pair in times of market turbulence. With Aussie net longs nearing stretched levels, risk-reward looks relatively attractive for AUD/CAD shorts.

Net Speculative Positioning in AUD and CAD (% of OI) – 3yr Z-Score

Source: Refinitiv

As the graph shows below, seasonal patterns tend to favour AUD/CAD bears particularly midway through Q2 with the worst month for AUD/CAD occurring in May.

AUD/CAD Historical Performance Chart

Source: Refinitiv

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