AUD/CAD Q2 FORECAST: SHORT AUD/CAD -- A RETURN OF US EXCEPTIONALISM

Much like my best trade for Q1 (CAD/CHF), that has generated a 7 percent yield (at the time of writing), I'll be sticking with the bullish theme for CAD. Heading into Q2, I'm bearish on AUD/CAD on US economic outperformance, BoC tapering and Timely placement.

A 1.9 trillion fiscal stimulus package has witnessed a whole host of economists revising higher US growth expectations, which should benefit the Canadian Dollar longer so than the Aussie on spillover effects. This also ties into the Federal Reserve which will be appearing towards applying the brakes on fiscal policy stimulation as strong US information is recognised. This usually means that the scatter plots may change towards a 2023 hike at the June meeting. Meanwhile, the rally in global bond yields has increased worries of a taper tantrum 2.0. Looking back at the first taper tantrum in 2013, AUD/CAD shorts performed nicely.

The Bank of Canada is slowly starting to go for the exit as crisis-fighting stimulus measures are closed, suggesting the central bank can taper strength purchases from the present CAD 4bln/week when April. By comparison, the RBA asserts the opinion that very significant financial support will be necessary for a while together with the Governor saying that markets expectation of rate rises in 2022 and 2023 isn't shared with the bank. This growing divergence is very likely to weigh on AUD/CAD.

Looking at CFTC Commitment of Traders net speculative positioning figures, it appears the markets are slightly net long AUD/CAD, increasing asymmetric risks on the downside for its set in times of market turbulence. With Aussie net longs nearing stretched levels, risk-reward seems relatively appealing for AUD/CAD shorts.