AUD and CAD and Interest Rate increase

The RBA and BOC both stated that they are going to increase the interest rates. Does this mean additional increase to the currencies strength?? And when can you notice such a thing??

I'm not a fundamentalist, but from what I've read, interest rates are one of the single biggest elements in determining currency strength. Demand for a currency increases as market participants seek to exploit interest rate differentials, the result of which is colloquially known as the 'carry trade'. So the answer is that, everything else being equal, a rise in interest rate should be positive for both AUD and CAD in the foreseeable future.

Attached are smoothed daily, weekly and monthly plots of currency strength, from my RS indicator. I use this indy as a proxy for weighing up all of the complexities between the different economic factors, and then expressing the result as it's confirmed by price. As we can see, the AUD (green line) and CAD (brown line) are already the strongest rising currencies on the weekly plot. An increase in their interest rates should, in theory, help this trend continue.

Hey guys, Can you help me with this one? Australian Home Loans is expecting to yield an improvement in the coming Wednesday’s session. I am looking for a more positive outlook for this pair which will probably exceed more than the forecast. Any comment on this, guys?

If only it were that easy. Just look at how pummeled the AUDUSD is getting lately.

As a general rule, the currency market doesn't give a crap about interest rate increases when stocks are falling by a few % each day due to global growth/Europe debt/double dip concerns, causing a flare up in risk aversion which leads to the USD and JPY being on a bid tone.

Now if the RBA signaled they were going to hike at the next meeting and at the next several meetings, it will help to support the AUD/USD, but if stocks keep falling and risk aversion is high, the bullish order flow generated by the increase in interest rates will be met with a whirlwind of macro/real money sellers, with the end result being AUD/USD going down, just not as much as before because the interest rate differentials would encourage some bargain hunter bids to slow the descent.

The name of the game right now is risk (aversion or appetite), global growth, Europe financial woes, etc. While Canada economic data has been very supportive for the CAD, the CAD is moving according to the global growth concerns, on may 7 their employment report came at 108.7K and the expectation was around 25k and even with such a strong reading the CAD lost ground against the dollar.

Anyone from you is considering trading NZD on Monday? I am thinking that NZD retail sales indicator will be positive like in the previous release... Any tips or suggestions about this..?

I agree with Lasker. Local economic data have little or no impact on AUD and CAD. And if there is some (short term) impact from their local economic data, sooner or later they will follow the trend of the major markets.

Hi guys,

Can anyone tell me why was there a dip in AUD/USD after the release of the Australian home loans news today even though the data was actually very positive.

Well. There are a few possible explanations.

1. The market was pricing in a much higher number than the 1.9% even the though the forecast number was 0.7%. As such when the 1.9% number came in it was at or below the expectations resulting in the down move as the market was disappointed. The report needed to be a monster report to move the aud/usd.

2. The market did like the 1.9% jump in home loans BUT, with the AUD/USD already up 300-500 pips from last week, a lot of the people already covered their shorts/and or are already long aud/usd so most of the bullish order flow that you expected was already sucked out of the market from last week. The market may just need to rest a bit before another bullish move.

3. The third and last potential explanation is that the market's sensitivity level to that particular news was very low. This means that the market did not care about the report. Meaning that it did not generate any order flow, meaning that any movement following the release of that report was just the "noise" of the market and not related to the release of the report. You just just as easily been oblivious to the report and would have been fine.


Now which of the three categories the report falls into I will let you decide.

Come up with your own explanations if you want to as well.

I would like to quote Hans Redeker (BNP-Paribas):
- You have to know what is the main story and what is noise. The main story of the Aussie is Chinese growth and global liquidity.

What it means is that China has a huge appetite for Aussie commodities while global liquidity is related to stocks and carry trade.

We know that there are some uncertainties regarding further Chinese growth (e.g. house bubble, export to Europe has slowed down etc..). In addition, there are a lot global liquidity issues right now because of debt problems in Europe, GB, japan and the US.

If trading the Aussie I would pay specific attention to the upcoming news in China (cpi, gdp) and US (trade balance, unemployment, cpi).

Hi grkfx

Thank you very much for your explanation . It goes to show news categorize as high impact can be nothing more then noise.

I will start analyzing how Chinese data is affecting the AUD

Hey guys... I am looking at the Asian session’s release of indicators on Monday and I have thinking that AUD PPI will probably gain… Would you consider this already a buy for the AUD? Happy to accept any feedback from you guys… Happy Trading…