Canadian, Australian (AUD) Exchange Rates Forecast to Decline as Global Outlook Shifts

Both the Aussie and the Loonie have enjoyed a strong run through mid-2014, but that could all be about to change according to Camilla Sutton, Head FX Strategist at Canada's Scotiabank who cites growing headwinds in the global ecnomic picture.

Commenting on the outlook for the two headline commodity currencies Sutton says:

"The shifting global outlook puts CAD & AUD at risk is a warning for EUR & GBP. Global data was disappointing and has renewed fears over how the recovery is unfolding.

"The combination of miserable tertiary industry index and machine orders in Japan, soft exports from China, low inflation readings in Germany, France and Spain and weak industrial and manufacturing production releases across Europe.

"This combination is likely to weigh on pro‐cyclical currencies, like CAD and AUD; and puts EUR and GBP at risk if their domestic data deteriorates further.

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Canadian dollar exchange rate complex hit by poor data

The forecast for the Canadian dollar in 2014 has been a negative one with the majority of research houses we follow all backing declines in the CAD this year.

However, recent strength has called the bearish stance into question and in recent months many scribes forced to pare back their negative forecasts.

However, a new turn lower in the domestic economic scene suggests there could be in fact room for deeper declines in CAD.

"The domestic environment in Canada points to a weaker CAD in Canada has softened. June closed with a weaker than expected GDP print, increasing just 0.1%m/m in April, this was followed by weak PMI, disappointing BoC business survey data and miserable employment on Friday (where June saw Canada lose 9k jobs)," notes Sutton.

The Bank of Canada will be pivotal in determining the Canadian dollar's near-term forecast says Sutton:

"All of which opens the door for the BoC, who holds an interest rate decision meeting on Wednesday, to highlight that considering the ongoing slack in the economy the surprisingly strong May CPI of +2.3%y/y on headline is unlikely to be sustainable.

"In addition, we expect the BoC to make reference to how a strengthening CAD is likely to leave the recovery in exports vulnerable and weigh on the broader economy. We expect USDCAD to shift back towards 1.08 and eventually 1.10."

Australian dollar: RBA minutes ahead

Aussie made a good start to the week, AUD/USD tests 0.9400/01 (21-dma) while AUD/NZD holds ground above the year-to-date ascending floor (approximately around the former support of 1.0660).

The RBA minutes will be released on Tuesday and dovish signals from the Governor Stevens raise curiosity on whether the minutes contain AUD-negative comments.

In his speech over the week-end, Stevens saidinvestors may be “underestimating the probability of a material decline […] but I can’t say when that might be”.

"Just a couple of hours before the RBA minutes, we adjust our positioning to neutral and stand ready to hear fresh AUD-negative comments. AUD/USD has rebounded from year lows amid the RBA shifted its stance from dovish to “neutral” on February 4th meeting and eased its sharp bearish tone in AUD (although repeating that AUD remained high by historical means). Given Stevens latest remarks, we see probability for sharper language on the FX rates," says Ipek Ozkardeskaya at Swissquote Research.

AUD/USD trades in 0.9200/0.9505 band since March 26th, this is above Fibonacci 50.0% level on Oct’13 – Jan’14 pullback.

"A breakout below is needed to confirm a renewed pullback period in AUD/USD. In the shorter-run, the first line of support is seen at 0.9339/54 (Fib 61.8% / 50-dma)," says Ozkardeskaya.

Domestic stories driving currencies

FX CFTC CoT sentiment data—The FX environment is not one of a broad USD trend but instead of domestic stories that are driving currencies.

Traders are bearish EUR, JPY and CHF, with net positions of ‐$10bn, ‐$8bn and ‐$1bn, respectively and bullish GBP, AUD, MXN, NZD and CAD; with net positions of $4.5bn, $3.4bn, $2.7bn, $1.3bn and $1.0bn.

However this week’s data is interesting as it provides the first warning signal for EUR bears and GBP bulls as the EUR short position failed to build and traders began to close out GBP longs.