Westpac See Upside Potential In AUD/CAD

“China’s sooner than expected reopening and buoyant global markets saw AUD/CAD rally 10% to the mid-0.95s in the three months to late January. But since then the cross has been paring back gains, down to the mid-0.92s. This retracement seems excessive, with the pair likely to resume trending higher multi-week/month. While prices for Australia and Canada’s key commodity exports have been steady lately, with iron ore holding around $125-$130t and Canada’s benchmark western crude holding around $55-$60/bbl, China’s rapid reopening and policymakers’ more accommodative housing stance favours Australia’s bulk commodity basket more than Canada’s gas heavy energy basket. The stark contrast between a cautious RBA that contemplated pausing on hikes in 2022Q4 and a decidedly hawkish BoC is in the rear view mirror too.

The BoC has moved to the sidelines with a “conditional pause”, while the RBA has been sounding more hawkish since the stronger Q4 CPI. The RBA dropped the qualification that they are not on a pre-set path in Feb and the minutes to that meeting showed the Bank even considered a 50bp hike. AUD/CAD likely finds a floor in the low-0.91s and should trend towards 0.95 into mid-2023.”