Synopsis:

MUFG anticipates potential appreciation in the AUD/CAD exchange rate due to differing monetary policy paths between the Reserve Bank of Australia (RBA) and the Bank of Canada (BoC). Recent labor market data from Australia shows resilience, suggesting the RBA may delay rate cuts, while Canadian economic indicators align towards earlier rate reductions by the BoC.

Key Points:

• Australia's Labor Market Resilience: The latest labor report from Australia revealed a stronger-than-expected job market, with only a minor pullback in March following significant gains in February. The unemployment rate edged up slightly to 3.8%, lower than the anticipated 3.9%. This resilience supports expectations that the RBA may delay rate cuts until Q4 of this year.

• Canada's Economic Indicators: In contrast, Canadian core inflation figures for March continued to undershoot expectations, recording the lowest rate since July 2021 at 3.0%. These developments suggest that the BoC could initiate rate cuts as early as June, contrasting with the more cautious approach expected from the RBA.

• Implications for AUD/CAD: The diverging economic outlooks and monetary policy expectations between Australia and Canada are likely to influence the AUD/CAD exchange rate. With the RBA on a slower path to rate cuts compared to the BoC, the AUD is poised to strengthen relative to the CAD.

• Broader Market Impact: The anticipated policy divergence is also affecting other currency pairs, notably USD/CAD, which is being pushed towards the 1.4000 level due to expectations of a widening policy gap between the BoC and the U.S. Federal Reserve.

Conclusion: The contrasting economic signals and monetary policy directions from the RBA and BoC provide a basis for potential AUD/CAD appreciation.