Coming in to Q2 my trade of short AUD/CAD had been predicated on US exceptionalism and the growing divergence between the BoC and RBA. While the US exceptionalism narrative dissipated, the theme of diverging monetary policy continues to bear watching. The divergence emerged was after the BoC tapered QE, while also signalling a rate increase for H2 2022. In contrast RBA signalled no rate increase before 2024. In Q3 AUD/CAD may be a catch up trade with BoC tightening priced into the currency, while strong Aussie data (employment in particular) may see the RBA to bring forward rate hike expectations.
Meanwhile my view is that USD will head higher from current levels. The consensus trade for arguably the past year has been to short the USD as evidenced by CFTC data showing the build-up in net short positions. However, the FOMC’s hawkish pivot in which the dot plot projections now see two rate hikes in 2023 from zero, suggests that the central bank’s reaction function has changed with FOMC less willing to allow the economy to run hot. Under these conditions, economic data will matter more and spur heightened volatility on data releases.
On the monetary policy front, the main dates to focus are the Jackson Hole Symposium (marks one year since the launch of AIT) and the September monetary policy meeting. Given the sizeable net short USD positioning, an unwind can provide fuel for a more prolonged rise as we head towards a Q3 taper signal. To add to this, an increase in “demise of the dollar” reporting late in Q2 coincided with the greenback’s low point, which could suggest that the pain trade would be for a more persistent rise in the USD.
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