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Poor construction data turns Aussie weak

Last week, Statistics Canada announced a lower than anticipated inflation in April and a decline in retail sales in March.

The poor m-o-m figures kept the Canadian dollar weak in spite of an oil rally. The Aussie, on the contrary, held its forte after the Australian Bureau of Statistics reported strong employment data. The Aussie was also supported by an upbeat monetary policy meeting minutes.

However, going forward, we expect the Aussie to lose strength against the Canadian dollar on the basis of the details provided underneath. At the time of writing this analysis, the AUD/CAD pair was trading at 1.0050 in the OTC market.

On Wednesday, the Australian Bureau of Statistics (ABS) reported a 0.7% q-o-q decline in the construction activities in March. The reported figure was lower than 0.5% decline expected by the market. During the last quarter, the construction activity recorded a 0.6% growth. The data is quite significant in the sense that it is a leading indicator of the GDP data, which would be reported about a week later.

Bank of Canada – Banque du Canada

Similarly, the Westpac-Melbourne Institute Leading Index fell from 1.11% in March to 0.92% in April. The index reflects a slowdown in the pace of economic activity. In the meanwhile, during the policy meeting, the Bank of Canada kept the benchmark interest rates unchanged at 0.5%. That was largely an expected decision. However, the market was surprised to hear an optimistic view of the Canadian economy. The BoC stated that the consumer spending and housing sector remain strong on improving labor market, and the trend is widespread across the country.

Thus, poor economic data is likely to keep the Aussie weak in the short-term, while a less dovish stance of the BoC could strengthen the Loonie. Thus, fundamentally, we expect the AUD/CAD pair to decline in the short-term.

The AUD/CAD pair is moving towards the lower band of the ascending channel, as shown below. The declining stochastic oscillator indicates an increase in the selling pressure. Given the weakness in the currency pair, we expect the pair to reach the next major support at 0.9830.

AUD/CAD Pair: May 26th 2017

AUD/CAD Pair: May 26th 2017

On the basis of above forecast, we may take a short position in the AUD/CAD pair near 1.0050. To ensure a favorable risk to reward ratio, we would place a stop loss order above 1.0150. We are also planning to book our profit near 0.9830, if the AUD/CAD pair moves as expected.

To take advantage of the impending downtrend, we may also pick up a put option contract offered by a binary broker. We would enter the trade only when the AUD/CAD pair trades near 1.0050. Furthermore, the option should also have June 3rd as the expiry date.

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