AUD/CAD: Goldman: Stick With Short AUD/CAD Despite Marginally Dovish BoC

Goldman Sachs note that “the Bank of Canada (BoC) refrained from opening the door to a January liftoff as we expected. We think this reduces the probability of a rate hike in January on the margin, but Deputy Governor Gravelle will deliver the Economic Progress Report tomorrow (December 9) to provide additional context to the decision. Despite being a tactical setback to our top G10 FX trade recommendation to short AUD/CAD (which has led to an unwind of the sharp move lower last Friday), our thesis still holds, and we view this as an opportunity to enter at slightly better levels. Bottom-up economic divergence between Canada and Australia - primarily our relative monetary policy expectations - has been one of the main rationales behind our trade recommendation. But we have also favoured the trade for its top-down macro betas, including its relatively high sensitivity to oil prices and its more equity-risk-neutral characteristics, consistent with our more cautious near-term macro outlook on the back of recent Omicron-related growth forecast downgrades. Investor interest in CAD crosses more broadly has risen in recent weeks on the back of the oil sell-off - and therefore prospects for a rebound - and stronger Canadian data that appear to be pushing the BoC towards liftoff in the coming months. While we see a case for going long CAD/JPY or short EUR/CAD on a tactical basis for more pro-cyclical expressions, we continue to favor AUD/CAD (with a trade target of C$0.85 and newly revised-down stop of C$0.92) as downside risk to global growth expectations combined with a hawkish Fed means that risks to the broad USD likely remain skewed to the upside.”