AUDCAD to Stay In Long-Term Downtrend (+ Short EURUSD entry)

This trade idea was first sent to subscribers of the Free Profitable Forex Newsletter on June 10 2022.

Triggering short EURUSD

First, a quick note on the short EURUSD trade idea we sent two weeks ago. 

Following yesterday’s price reaction to the ECB meeting yesterday, it becomes evident that EURUSD wants to move lower from here. The ECB was as hawkish as it could get, and yet EURUSD fell on the day. By itself, this is a bearish signal. EURUSD also broke the key intraday support around 1.0650 and is extending the move down today following the hotter than forecasted US CPI inflation report. In line with this, entering short makes sense, aiming for our targets toward 1.05 and 1.0350 (entry this morning from 1.0625).

Now, let’s turn to the topic of today’s newsletter, the longer-term outlook for AUDCAD.

AUDCAD bear trend likely to remain intact

The AUDCAD pair fell by around 500 pips from early April to mid-May, closely coinciding with the sharp fall of the Chinese yuan over the same period. The correlation of the Australian dollar with the Chinese currency is no news. Australia’s economy is closely linked and dependent on the much larger Chinese economy; hence the Aussie dollar often takes cues from the Chinese yuan for direction. 

While the yuan has been very stable since early 2021, it fell sharply in April this year. The harsh Covid lockdowns in China and the big hit to their economy are behind the yuan’s fall (USDCNH exchange rate higher). The Australian dollar was automatically pulled down with it. The outlook for the Chinese yuan (CNH) remains bearish, with USDCNH likely to progress further higher toward the 7.00 area (current spot price is around 6.70). This means there could be potentially great downside potential for the Australian dollar as well over the coming weeks and months as China is battling a serious economic slowdown due to Covid lockdowns. AUDUSD will likely slip below 0.70 and stay lower over the coming months, also pressured by a general risk-averse mood and hawkish Fed.

Looking at the CAD side of this AUDCAD trade, it also favours an extension of the bearish trend. Canada’s economy remains robust, and the Bank of Canada is currently one of the most hawkish in the world. Furthermore, the proximity to the United States (another economy that is doing well) should help to ensure that both the US and Canadian economies safely weather any storms from high energy prices and rising interest rates that may pull other economies into a recession. This should continue to keep the CAD and USD dollars broadly firm versus their peers. By extension, the AUDCAD pair should continue to be pressured over the coming months by this relative underperformance of Australia compared to Canada.

AUDCAD Weekly Technicals: inside bearish channel

AUDCAD has been trading in a long-term downward channel since February 2021, reaching lows around the 0.8900 area twice this year. It is now retracing up inside the channel since USDCNH started to retrace down in mid-May. But this AUDCAD rally could be an attractive opportunity to establish short positions for another bearish leg that may occur during the summer. 

Firm channel resistance should exist at levels above 0.93 (0.93-0.94 area), if AUDCAD gets that high at all. Given the fundamental backdrop (see above section), AUDCAD may slip down without completely a full retracement leg toward 0.93. A risk-off episode (e.g., fueled by a stock market crash) would likely also pressure AUDCAD down rather than up, although the exact reaction would likely be very dependent on specific circumstances.

The daily chart shows us that the retracement channel suggests AUDCAD can reach 0.92 before encountering notable resistance from Fibonacci ratios and trendlines. On the other hand, if AUDCAD breaks below the previous low at 0.89, it could be the start of a new bearish leg down.

However, given the tendency of AUDCAD to often trade trends in a zig-zag pattern, we should better be wary of breakouts. Hence, looking to go short at higher levels toward the big resistance at 0.92 or 0.93–0.94 seems like a safer strategy. It would also allow for the placement of a much tighter stop.

Trade Plan

Entry: 

• Look for the current retracement to extend higher toward at least the 0.92 zone. Then bearish signals on the daily chart around this area or higher could pinpoint the high and end of the retracement. 
• Such a scenario would likely be a good opportunity to enter short.

Stop loss: 

• Above the high of the entry pattern (somewhere above the 0.93-0.94 area based on the scenario described)

Targets: 

• 0.85 - 0.87 area

Trade signals from the past weeks

• May 16, Long EURGBP from 0.8490 (open in progress); we could be getting to a point where it may make sense to exit this one, with the BOE meeting scheduled next Thursday; perhaps looking for re-entry at lower levels would be a safer strategy (trade idea sent May 11, 2022)
• June 03, Short GBPUSD from 1.2540, open in progress (trade idea sent June 02)
• June 10, Short EURUSD from 1.0625, open in progress (trade idea sent May 27)  

TOTAL P/L in the past week: 0 pips

TOTAL: +5410 pips profit since October 1, 2018