AUD/CAD – Prime for a Move Below 98 Cents

We are short AUD/CAD ahead of tonight’s Australian employment report. Thanks to the rise in commodity prices and improvement in risk appetite, AUD was the day’s second best performing currency behind the CAD. However tonight’s employment report could erase the gains in the currency if they show deterioration in the economy. While the retail sector helped offset the losses in mining, Australian mining companies are now on the verge of bankruptcy and we could see thousands of layoffs over the next several months. According to the PMIs, weaker employment conditions were seen in the manufacturing and service sectors in the month of January. This signals that there was very little recovery in the labor market after net job losses in December. Given the importance of job growth, a soft report could trigger a significant reaction in AUD and highlight the contrasts between Australia and Canada’s economies. Crude prices jumped 5% today after Iran said they would support OPEC’s production freeze. While there has been some confusion as to whether “support” equals action, oil traders are simply relieved that the world’s fourth largest holder of oil reserves is willing to cooperate. After 3 years of Western sanctions, Iran is finally able to bring production up to competitive levels and they are on a campaign to increase output by at least a third this year. So it remains to seen how willing they really are to limiting output levels. With OPEC not scheduled to meet again until the summer, these positive headlines should fuel a stronger recovery in oil and in turn the Canadian dollar.

Technically AUD/CAD is trading between 2 important levels. The break below the 50-day SMA is significant in that it also took the currency pair below the 23.6% Fibonacci retracement of the 2008 to 2012 rally and the 50% Fib retracement of the 2012 to 2015 decline. There’s near term support at 0.9775 but for AUD/CAD the most important support is at 0.9715 because that’s where the monthly low and 100-day SMA coverage.