AUD/CAD breakout puts the Bradman barrier in sight

• AUD/CAD breakout pushes to early-2021 highs
• Yield spreads and industrial metals favour Aussie

• Major Canada and Australia event risk looms

Breakout puts 0.9994 firmly in focus

AUD/CAD has broken to its highest level since early 2021, powered by a significant hawkish repricing of the RBA rate outlook, the opposite to what's been seen in Canada, along with strong gains in industrial commodities. However, before longs get too excited about a resumption of the prior bullish trend, one very familiar number for many Australians stands between the pair and a potential run above parity.

As you can see in the chart below, AUD/CAD had been coiling in a wedge-like structure going back to April, with the range gradually constricting over that period. However, after bouncing from the minor uptrend running off the March lows and reclaiming the 50 and 100-day simple moving averages, the pair has broken through the topside of the structure this week.

Source: TradingView

The move has not only cleared wedge resistance, but also the 23.6% Fib retracement of the GFC low-high at 0.9939. As things stand, it's now holding above the May 13 high of .9958, leaving it at levels not seen since early 2021.

While the breakout points to a potential resumption of the broader bullish trend from the Liberation Day lows, one familiar number for many Australians still stands in the way. At 0.9994 sits the February 2021 swing high, matching Sir Donald Bradman’s famous Test batting average of 99.94. If AUD/CAD can clear the "Bradman barrier", there’s little obvious technical resistance until above 1.02.

Momentum strengthens the case for longs

As long as the pair continues to hold above the May 13 swing high, it creates a setup where longs could be set with a tight stop beneath either that level, the 23.6% Fib retracement of the GFC low-high, or former wedge resistance, depending on the desired risk-reward.

The immediate focus overhead is 0.9994. A break above the Bradman barrier that sticks would strengthen the case for an extension towards 1.0240, the swing high set back in March 2018.

Momentum is also with the bulls. RSI (14) has pushed well above the neutral 50 level to its strongest reading since May, while MACD has staged a bullish crossover and is now pushing sharply higher. That improves the prospects of the breakout sticking.

Rates repricing and metals back the move

The bullish technical picture is being reinforced by an abrupt hawkish repricing in Australia’s interest rate outlook over the past week, which has seen the country’s two-year yield advantage over Canada widen by 16.7 basis points over the past five sessions. That move ranks in the 95.5th percentile of five-day changes since 2014. Not unprecedented by any stretch, but noteworthy nonetheless.

Source: TradingView, FOREX.com

At the same time, some of the hawkish pricing around the Bank of Canada has been retraced following the latest escalation in trade tensions with the US. The US has slapped 50% tariffs on around $20 billion worth of Canadian imports, with Canada retaliating on a similar value of US goods. That creates additional downside risk for the Canadian economy and, by extension, the interest rate outlook at a time when inflation is already very soft.

That matters because the pair continues to demonstrate a moderately positive correlation with both short and longer-dated yield spreads across the past week, month and quarter.

Industrial metals are also providing the Aussie a tailwind, despite both nations being commodity superpowers. AUD/CAD has demonstrated a similarly positive relationship with industrial metals over the same periods, with the complex rallying strongly in recent weeks and seemingly favouring the Aussie over the loonie.

With key macro drivers working in the same direction, the focus over the next week will be on the economic calendar, with a slew of major events ahead.

Major event risk looms

The calendar is loaded with event, especially in Canada. Q2 GDP will be released later today, while Australia gets its own figures next Wednesday.

The bigger event for AUD/CAD may be the Bank of Canada rate decision, also on Wednesday, particularly given the pair’s consistent relationship with relative yield spreads. Markets still retain some risk of a rate hike later this year, but that pricing may come under pressure following the latest escalation in trade tensions. With the US such an important trading partner, the question is whether the Bank of Canada pushes back against lingering hike expectations given the potential hit to growth.

Canadian employment figures then arrive next Friday, adding another obvious source of volatility for rate expectations and the loonie.