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The current risk environment and a sweet technical setup brings AUD/CAD back to the top of our longer-term watchlist. Is the recent rally done and ready to reverse?

AUD/CAD has been on our watchlist for a bit, going back to early February when it bottomed out around the 0.8900 handle. We said that the area between the strong area of interest (around .9100) up to the falling trendline is the area to watch for a potential opportunity to play the longer-term downtrend at better prices, and it looks like the market is finally there after a couple more weeks of Aussie strength.

AUD/CAD: Daily

AUD/CAD Daily Forex Chart

AUD/CAD Daily Forex Chart

On the daily chart above, the market has basically retested the falling ‘highs’ pattern and is currently in the process of forming a Evening star pattern (a triple candlestick pattern the sometimes precedes a bearish reversal). This may draw in technical traders into the longer-term downtrend as the potential risk-to-reward is much more favorable at these levels.

Using a tight stop above the falling trendline/previous swing high and targeting the previous swing low gives a potential return range of around 1.50:1 or more.  And this is possibly attainable in month or so with the right environment.

Looking forward, we do have major catalysts that could keep volatility high for AUD/CAD, most notably the Reserve Bank of Australia and Bank of Canada’s latest monetary policy decision next week, followed by Canadian inflation and Australian employment the week after.

So, the scenario we’re watching out before considering a short on AUD/CAD is where the RBA pushes back on multiple rate hikes once again, and if the BOC gives us more than a 25 bps hike and/or raises expectations of an accelerated rate hike schedule.

This scenario coupled with the continued rise in oil prices gives the best odds of the Loonie out performing the Aussie over the next month, and this trade of two risk-on currencies against each other shields us a bit from the current volatility induced by the Russian invasion of Ukraine. Not a bad play.

But what do y’all think? Will Loonie bulls take back the reins on AUD/CAD? Will we see any surprises from the central banks next week? Please let us know in our comment section below!

This content is strictly for informational purposes only and does not constitute as investment advice. Trading any financial market involves risk. Please read our Risk Disclosure to make sure you understand the risks involved.