AUDCAD looks primed for downside reversal as BoC and RBA rate decisions highlight potential rate differential

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AUDCAD looks primed for bearish phase as central bank decisions highlight potential divergence on rates

Source: Bloomberg

 Joshua Mahony | Senior Market Analyst, London | Publication date: Tuesday 06 September 2022 

Central banks in focus

The past fortnight has brought economics and interest rates back into focus following a period of earnings related upside for equity markets. The role of interest rates as a driver of disinflation and economic contraction is of particular note this week, with the RBA, BoC, and ECB all reporting their latest rate decisions within a 3-day period. Today’s 50-basis point hike from the RBA was at the top-end of market expectations, with pricing largely split between a 25bp and 50bp move. That stands in stark contract of the 75bp moves expected at the BoC, ECB, and Federal Reserve. Part of this will be down to the fact that Australian inflation is nowhere near the levels seen in North America and Europe, as seen below. Part of that will come down to geography, with the influence of Russian energy restrictions in Europe playing less of a role for countries that either receive those exports at a discount, or produce their own oil & gas.

Source: Eikon

For Australia, they are facing a major housing downturn, with the Reuter poll below highlighting how the rise in rates could exacerbate a downturn that has already seen Australian house prices. That decline has already seen house prices record the steepest drop in four decades. With inflation less of an issue, and house prices under threat, it is obvious why the RBA will want to keep a lid on interest rates where possible. That could drive underperformance for the Australian dollar as the interest rate differential grows.

Source: Reuters

With the BoC rate decision approaching, the likely 75bp hike could drive AUDCAD lower. The chart below highlights the long-term downtrend, with price taking a hit in the wake of the RBA decision. The daily chart highlights the head and shoulders formation that has been completed after a break below the 0.8921 level. We have subsequently dropped into the next major support level of 0.8877. Given the long-term downtrend, there is a good chance we see plenty more downside from here. That bearish outlook holds unless we see price rise through the right shoulder of 0.9051.

Source: ProRealTime