- Pound at top of range 'make-or-break' vs. Canadian Dollar
- Brexit breakthrough needed for bullish breakout
- Otherwise, 1.72 to push GBP/CAD back down
The Pound-to-Canadian Dollar exchange rate has risen to the top of its range at 1.7200 suggesting there is now an increasing chance the pair could hit a 'glass ceiling' and see further gains capped.
The pair has touched the same resistance level at least 5 times since it started going sideways in August 2018.
Each time it was rebuffed and fell back down into the range.
Whether or not it will be rejected this time remains to be seen but price action over the remainder of the week could be critical.
The Canadian Dollar is enjoying a boost against the U.S. Dollar at the time of writing, but so is everyone else, with the mid-term elections proving rather bearish for the Greenback. Therefore, the Canadian unit will be looking for domestically-generated strength to defend against Sterling.
We have to start from the assumption that the past will be repeated and the pair will probably be rejected again and pull-back, although a surprise news event or other fundamental catalyst could still provide the impetus for an upside breakout.
Brexit headlines suggesting a Brexit Withdrawal deal is close at hand have helped drive the exchange rate higher and they could still supply the required 'shock' news event to spur a breakout.
A key meeting of the U.K. Cabinet on Tuesday resulted in fresh speculation that the E.U. and U.K. are ready to move on a Brexit deal. The BBC's Laura Kuenssberg said ministers were told to "be ready for another Cabinet meeting, maybe even at end of this week, because there might be enough movement by then to push button on a deal."
The latest point of contention in negotiations is about the mechanism by which a possible U.K.-wide customs union backstop would be terminated.
Ireland has rejected the option of the UK being able to unilaterally withdraw from the customs union after a set period or for the arrangement to have a set duration after which it would automatically expire, fearing this would result in a hard border between Northern and Southern Ireland.
Yet Brexiteers don't want to see the possibility of an indefinite extension of the backstop arrangement as this could lock the UK interminably in a 'neither-in-or-out' relationship with the EU.
Ultimately, whilst sticking points remain, talks do seem to have moved on somewhat from their previous impasse, and if a deal materialises it would provide the impetus for an upside breakout.
Oil Poses Headwinds for the CAD
The Canadian Dollar is a mid-league player in the G10 complex across all timeframes.
The currency has found some support from the USMCA deal which was agreed at the beginning of October which removed a risk premium which had been weighing on CAD since the U.S. threatened to pull out of NAFTA.
The Canadian economy has been strengthening on the back of stronger U.S. growth which tends to impact positively on Canada due to geographical proximity and close economic ties.
Most onlookers expect the Bank of Canada (BoC) to raise interest rates at least 3 times next year now the NAFTA uncertainty has been removed and economic fundamentals are back in the driving seat.
"Bank of Canada Governor Stephen Poloz and Deputy Carolyn Wilkins testified in parliament and expressed optimism about the economy," says Yohay Elam, an analyst at FXStreet reporting on a recent speech by BoC governor Poloz. "Wilkins went further and said it is the best time to raise rates. The economy grew by 0.1% in August, better than had been expected. In addition, job growth also surprised to the upside with 11,200 positions gained."
However, Working against the Canadian Dollar are oil market dynamics, and partly due to the falling price of crude oil, which is Canada's premium export commodity.
"Oil price developments pose the greatest near-term risk for the CAD as Brent and WTI attempt to stabilise following their recent declines. We will also be watching the price of WCS as it once again closed below the $20/bbl level on Tuesday," says Shaun Osborne, Chief FX Strategist with Scotiabank in Toronto.
The main reason the price of oil fell is related to U.S. sanctions on Iran. Rather than cut off Iranian oil supply altogether and risk a spike in oil prices, the U.S. has allowed a clause in sanctions which enables Iran to continue exporting oil to eight countries.
"Iranian oil will eventually reach global markets as the U.S. is set to waiver the upcoming sanctions from eight countries. In addition, the supply/demand balance tilted against the price of the black gold. The downfall in crude, which is in a bear market, weighed heavily on the loonie," says Elam.
If the price of oil continues to move lower the Loonie will be vulnerable regardless of domestic factors and this would be likely to support more upside in GBP/CAD.
At the moment the two currencies are closely matched - both have undergone the threat of trade tensions with a larger neighbour - Canada with the US and the UK with the EU; but whilst Canada has resolved its trade dispute the UK remains locked in negotiations.
Normally this would be expected to result in the Canadian Dollar rising versus the Pound, but in this instance, the fall in black gold has weighed on the loonie and is partly what is keeping the pair rangebound between the 1.72 highs and 1.66 lows.
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