CAD, AUD look set to benefit as the USD bull case becomes unhinged

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Hot producer prices confirmed what this week’s CPI report already reminded us: inflation pressures are persistent and also rising.

Core PPI increased to 3.6% y/y in January, above 3.3% expected
December’s figure was upwardly revised to 3.7% y/y from 3.5%
While core PPI rose 0.3% as expected in January, December’s figure was also upwardly revised to 0.4% from 0%

Yet markets took the info within stride, instead focussing on the fact that Trump’s reciprocal tariff plan has been delayed until April. This provides breathing room for negotiations to take and deal and exemptions to be struck, which plays nicely into my view that all the talk of high tariffs was another classic hard-bargaining chip from Trump.

This provided a mild risk-on tone for market which saw Wall Street indices rise, oil rise alongside key metals (with gold closing at a new record high) and all FX majors rise against the US dollar. The Canadian dollar was the leader of the commodity FX group with CAD rising 0.9% against the dollar, while AUD/USD and NZD/USD rose around 0.65%.

USD index vs futures market positioning – COT report

I outlined this in the weekly COT report and a video, but it is worth mentioning again. Bullish sentiment to the USD has weakened, and price action this week bolstering the case for a pullback on the dollar.

Large speculators increased gross-long exposure on all FX majors against the US dollar last week
Net-long exposure to all FX futures contracts were reduced by -$3.1 billion last week, the most aggressive weekly reduction since late September
Asset managers (who have tracked the dollar’s direction very well in recent years) reduced their net-long exposure for a third week

Commodity FX (AUD/USD, NZD/USD, USD/CAD) technical analysis

Few expect a turning point when it happens. Cast your minds back to the tariff headlines of two weeks ago, and the hype it caused and headlines that followed when USD/CAD surged to 1.48 and AUD/USD plunged to a 4-year low. Forecasts were extrapolated, yet two weeks later those markets have performed sharp reversals.

While the RBA are expected to cut rates by -25bp next week, it has been expected for a few weeks and I doubt it will be a dovish cut (where they signal further cuts). Likewise, the BOC may not be in a position to cut much more given the threat of tariffs, even if they have been delayed. RBNZ are the odd one out as they could still cut by 25-50bp at their next meeting.

But my point is that few foresaw the reversals on these commodity-FX pairs, so they should be prepared for some more counter trend wriggle room, especially if the US dollar does provide a deeper correction counter to the majority view of USD strength.

AUD/USD is trading just pips beneath the January high and ~30 pips beneath my August-low target. This will be an important level to monitor, and admittedly one that could prompt a pullback. But price action continues to suggest to me that we could be looking at further upside, and therefore is a market in my ‘dip’ watchlist for a potential move to 0.6390. Note that the daily RSI (14) is confirming the rebound and nowhere near overbought.

NZD/USD is the laggard of the pack, and rightly so with the RBNZ potentially cutting rates by 50bp at their next meeting. But it did form a bullish engulfing candle o Thursday, so bulls could consider retracements within its range for a move up to the January high. Unless we see a reversal from RBNZ, its upside is likely to remain capped compared to AUD/USD or CAD.

USD/CAD is accelerating lower after an almighty momentum shift at 1.48. Prices are approaching a weekly VPOC at 1.4168, so perhaps an interim low is near. But my bias is to fade into moves within Thursday’s range for an eventual break below 1.410, with 1.40 then coming into focus around the 2022 high and November VAH (value area high).

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-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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