CITI: The Australian dollar has met its match in Canada’s ‘loonie’

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The Australian dollar has pushed above parity against its Canadian counterpart, but Citi analysts expect that to change as key data is released over the next week.

In a research note on Thursday they argued that the AUD is running ahead of itself against the “loonie”, and outlined a price target of $0.9750.

The AUD’s recent push towards US80 cents has been partly driven by US dollar weakness which has been a prevailing theme of late.

But the AUD’s strength over the past week has been broader than that, driven a string of good domestic data points and higher commodity prices.

The market also assessed Tuesday’s minutes from the RBA’s July meeting as being more hawkish, which pushed the AUD higher against most major currencies.

That includes the Canadian dollar, with the AUD currently above parity after buying less than 97 Canadian cents a week ago.


Citi analysts are forecasting that this new-found strength won’t last.

As David Scutt pointed out on Tuesday, the RBA minutes have brought forward market pricing of future interest rate rises in Australia to the middle of next year.

“However, this still leaves investors pricing in only limited risk for tightening in the near term,” Citi said.

They noted that AUD/CAD has in fact run ahead of the interest rate spread between the two countries, as shown here:

Source: Citibank

Citi also argued that inflation in Australia remains subdued, which skews the likelihood of an interest rate rise in Australia.

That makes the outcome of next Wednesday’s CPI data release in Australia a key piece of the puzzle.

“The worse-than-expected outcome on equivalent data for NZ implies some downside risk to the Australian data,” the Citi analysts said.

Canada releases its CPI data and retail sales figures tomorrow night, but “the Bank of Canada has already demonstrated willingness to look through softness in inflation so the importance of tomorrow’s CPI may be somewhat lower,” they said.

Citi also argued that upcoming speeches from RBA board members may also weigh on the AUD, given that the bank has repeatedly stated that an appreciating currency would “complicate” Australia’s transition away from the mining boom.

Deputy Governor Guy DeBelle speaks on Friday, followed by Governor Lowe next Wednesday.

While today’s June employment report came in close to forecasts and showed strong growth in full-time employment, the AUD has dipped slightly against the major currencies in midday trade.