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The Pound-to-Canadian-Dollar Rate Seen in Narrow Range as Analysts Differ Over USD/CAD 

Image © Pavel Ignatov, Adobe Stock

- GBP to hold 1.74 as USDCAD climbs says Scotiabank tech analyst.

- USDCAD to test 1.36 again on short-covering says Bank of America. 

- Morgan Stanley differs, sells USDCAD from week high in 1.35 area.

The Pound-to-Canadian-Dollar rate is condemned to trade within a narrow range over the coming week, according to technical analysts at Scotiabank, although the outlook for the USD/CAD rate appears to be dividing forecasters and strategists. 

Pound Sterling has been trading places with the Loonie all week, dropping into and out of the first place in the G10 league table with each rise and fall of the Canadian Dollar relative to its U.S. counterpart, and continued to do so Friday. 

"GBPCAD pushed through, but failed to hold above, short-term trend resistance off the March high yesterday, leaving the GBP trapped between the 40-day moving-average (1.7525) and strong support at 1.7300/20. The cross has essentially traded in a tight range around 1.74 over the past month after falling sharply (and developing a strong, bearish signal) around the turn of the month through Feb/Mar—and that flat trend might continue for now," says Eric Theoret, a technical analyst at Scotiabank. 

Theoret says the short-term outlook for the pair is neutral but that longer-term price action suggests downside risks over a multi-month horizon. He warns that if the rate falls below 1.73 then it could ultimately encourage a trip down to 1.70 by the market. 

The Pound-to-Loonie rate was sitting on a -0.04% decline for 2019 Friday but frequently sees gains or losses of 0.4% or more in any given session, which means each and every day in the present market can see Sterling and the Loonie vying with each other for the top spot in the G10 bucket. 

But with the Bank of Canada (BoC) having said its bit for now and given little movement in the Brexit process, the Pound and the Canadian Loonie continue to oscillate within a narrow range that is akin to a kind of no man's land. 

Above: Pound-to-Canadian-Dollar rate shown at daily intervals 

"The USD’s break from the 1.33/1.34 range and above trend resistance off the early 2019 high looks well supported on the charts. Trend strength signals are aligned constructively on the shorter term studies but a clear and broad alignment in these oscillator signals has yet to develop. We think risks are tilted towards a test of 1.3560/1.3660 and look for the USD to remain well-supported on dips," Theoret says, of the USD/CAD rate. 

The Pound-to-Canadian-Dollar and USD/CAD paths ahead are relatively straightforward, at least as far as technical analysts studying momentum gauges as well as short and long-term price trends are concerned. However, fundamental analysts who look mainly at the underlying drivers of capital flows are much more divided in their outlooks for the Canadian Dollar. 

"Short USD/CAD positioning, particularly among real money investors, is susceptible to liquidation risk. Our LCBF data indicate that the recent round of short positioning initiated in the 1.32-1.33 range is increasingly underwater and vulnerable to covering around 1.35Recall that real money shorts established in the 1.30-1.31 range back in 3Q came under pressure around 1.32-1.33 late last year," says Ben Randol, a strategist at Bank of America

Randol and the Bank of America team are eyeing a possible knee-jerk climb higher by the USD/CAD rate in response to the levels it has assailed during the current week, which has pushed the exchange rate up from 1.3350 to 1.35.  

The idea behind this concern is that all of those investors who piled into bets against the USD/CAD rate in late February and early March, following the recovery in oil prices that drove the exchange rate off a December 2018 peak of 1.36, will now be close to abandoning their trades. 

This matters because in order to abandon a trade that involved selling the greenback and buying the Loonie, an investor has to then sell the Canadian Dollar and buy back the U.S. Dollar, which could simply drive the USD/CAD pair even higher still. 

Above: USD/CAD rate shown at daily intervals.

"Over the mediumterm, we assess that monetary policy and structural flow risks continue to be skewed in the direction of higher USD/CAD and expect a retest of 1.36 through mid-year. The USMCA ratification process is likely to be protracted, contentious and potentially unsuccessful," says Randol. "Downside risks to our USD/CAD forecast include a further rise in oil prices and an exogenous decline in risk appetite the result of reduced global trade policy uncertainty."

Randol's commentary comes after the Bank of Canada abandoned the 'tightening bias' that would eventually have seen it go on lifting interest rates over the coming quarters, before shifting to a so-called neutral bias on Wednesday.

The BoC says the outlook means the economy still needs an interest rate that is below the so-called 'neutral' range where monetary policy is neither restrictive nor stimulative, which is why it shifted to the neutral bias  which means Canadian interest rates could now go either up or down in the next change.  

That was part of a u-turn by the BoC on earlier forward guidance, which suggested in October that rates could rise as many as three times in 2019. And even though markets were expecting some form of negative message Wednesday, the Canadian Dollar was still hurt by the BoC's announcement.

But despite all of that some are actively betting on a steep fall in the USD/CAD rate over the coming months, including the currency team at Morgan Stanley

"The outlook for crude oil continues to be positive as OPEC+ supply cuts continue to impact the market and global demand rises. A rebound in growth in China and Europe would support this further," says Hans Redeker, Morgan's head of FX strategy. "The BoC sounded dovish in April, but stronger economic data could surprise a market positioned heavily against CAD."

Redeker wrote to clients weeks ago telling them to wait for USD/CAD to hit 1.35 before betting on a fall all the way back to 1.29 during the summer months. That trade was activated this week in the aftermath of the BoC sell-off. 

"Should global growth continue to stabilize and rebound, financial conditions stay loose,and US growth remain relatively supported, the BoC may once again discuss the need to get rates back to neutral. A risk to the trade is that global crude prices begin to fall, weighing on CAD," Redeker adds.

Above: USD/CAD rate shown at weekly intervals.

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