AUD/CAD should grind lower – Westpac

Sean Callow, Research Analyst at Westpac, points out that AUD/CAD has been trending lower since printing 2017 highs above 1.03 in May and the Bank of Canada has raised its policy rate twice in this time.

Key Quotes

“While the BoC appears not to be in a hurry to tighten again, the contrast with the ultra-steady RBA should help keep a lid on any AUD/CAD rallies. So long as markets are debating when the BoC will hike next, AUD/CAD should grind lower, with 0.95 in sight around year-end.”

“Near term, the BoC should indeed bide its time. Canadian growth has been volatile over the past year, partly due to interruption to oil production by wildfires in 2016. GDP growth surged from below 1% y/y in mid-2016 to as high as 4.7% by May 2017.”

“Canadian growth had already decelerated to 3.5% by August. The BoC projects year average growth to slip to 2.1% in 2018 and just 1.5% in 2019. But with the policy rate still just 1.0% and inflation expected to reach the 2% target in H2 2018, CAD should keep finding support from market anticipation of 2018 rate rises. This should see USD/CAD slip to 1.25 multi-week.”

“AUD/USD should be more rangebound around 0.76 with Q3 GDP to support the RBA’s steady hand into 2018 and commodity prices about neutral for AUD.”