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Pound-to-Canadian-Dollar Rate to Break Key May Lows says Scotiabank

Image © COSPV, Adobe Stock

- GBP/CAD in a bearish sideways move.

- Likely to break lower as longer-term trend exerts.

- Fundamentals support the negative outlook.

The Pound-to-Canadian-Dollar rate is biased to weaken both from a fundamental and technical perspective, according to analysts at Scotiabank, who say the Pound will soon slip beneath a five-month low set in May.

The fundamental risks are predominantly political in nature as the UK economy is showing resilience. PMI surveys have showed manufacturing and construction activity into contractionary territory, but a gain in more important services industry in May.

The mixed PMI results meant the composite PMI, an important leading indicator for the economy, showed no change. 

The greater risk to Sterling and the UK is political and stems from the probability that the next leader of the conservative party and therefore of the country will be a eurosceptic, increasing the possibility of a 'no deal' Brexit.

“The leadership campaign is likely to see candidates talk up their hard Brexit credentials in order to impress the anti-EU wing of party members who have the ultimate say in who will lead the party,” says Shaun Osborne chief FX strategist at Scotiabank.

A further factor is that the clock is ticking and time is running out for the government to reach a withdrawal deal with the EU. The frontrunner in the leadership race is Boris Johnson, who recently said he would ensure a Brexit at all costs on October 31, suggesting he might take the UK out of the EU without a formal deal being agreed.

“There is precious little time remaining to reach a deal now and regardless of the winner, no-deal Brexit worries may strengthen,” Osborne says.

Not only are Scotiabank analysts bearish on the Poun, but they are also bullish on the Canadian Dollar, as they find the Loonie fundamentally undervalued. This means it's currently cheap when economic factors are taken into consideration. The inference is that it will drift higher toward ‘fair value’ over time.

“CAD remains fundamentally undervalued relative to our estimated equilibrium however the discount appears to be moderating. Domestic risk is limited ahead of Thursday’s trade and Friday’s employment releases,” Osborne says.

Above: Pound-to-Canadian-Dollar rate. Pound Sterling Live technical analysis. 

Scotiabank's bearish Pound and bullish Canadian Dollar fundamental analysis suggests GBP/CAD is likely to decline. This also happens to chime with the bank's technical analysis, which uses chart patterns and price action to forecast the future direction of the exchange rate.

“GBPCAD is firmer on the day so far but the technical signals here remain tilted towards the downside,” says Eric Theoret, a technical analyst and colleague of Osborne's. “Price action this week has suggested a downside break from the consolidation (bear triangle) and a resumption of the downside move (outside range lower Monday)"

The pair has been trading in a fairly narrow range, or sideways consolidation since the May decline found a floor at the 1.6906 low. However, the exchange rate is likely to eventually break down out of this range, which Scotiabank calls a ‘bear triangle’, and continue its downtrend.

The 23rd of May lows at 1.6906, are the “last tangible level” of support before a ‘sheer’ drop to the 1.65/1.67 region that would see the longer-term bear trend extend further.

“We think the downside pull from longer-run price action and bearish trend signals is more or less irresistible for the GBP. We continue to see limited scope for GBP gains beyond the low 1.71 area,” Theoret says.

Scotiabank does not say when it expects the 1.6906 lows to be achieved or when the 1.65/67 targets will be hit, but Pound Sterling Live analysis suggests the former could be hit in the next 1-5 days and the latter in the next month. Pound Sterling Live analysis was set out in a week ahead preview published on Sunday. 

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