The Pound-to-Canadian-Dollar Rate "Bear Trend" is Faltering, Analyst Says

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- GBP/CAD downtrend risks being compromised says Scotiabank.

- As GBP exchange rates stabilise and the CAD goes into retreat.

- Scotiabank says downside likely to prevail, new GBP lows await.

- Forecasts of GBP depreciation widespread as Brexit day looms.

The Pound rose against the Canadian Dollar Friday amid wagers suggesting parliament may after all find a way to prevent a 'no deal' Brexit in October, and analysts at Scotiabank say that nascent gains risk compromising the "bear trend" that's already driven the exchange rate down by seven percent this year.

Pound Sterling advanced handsomely against all of its G10 rivals Friday amid speculation that opposition MPs and various other factions in parliament could put their differences aside in order to construct 'government of national unity' that would act as a caretaker if opponents of the government's Brexit policy are win widely anticipated confidence vote when parliament returns from recess in the first week of September.

Lawmakers are conspiring in order to prevent a 'no deal' Brexit on October 31, which the government says must happen if the EU refuses to open fresh exit talks with the newly-installed Prime Minister Boris Johnson. The Pound has fallen relentlessly for months as the spectre of a World Trade Organization (WTO) relationship with the EU was perceived as steadily becoming more likely. 

"GBPCAD remains weak after testing the 1.60 area late last week but the underlying trend lower does appear to be moderating. The process of lower lows and lower highs—the essence of the bear trend—is in danger of being compromised by GBP gains through the 1.6230 area and trend channel resistance," says Eric Theoret, a technical analyst at Scotiabank. 

Above: Pound-to-Canadian-Dollar rate at 4-hour intervals, and GBP/USD rate (black line, left axis).

The Pound traded 0.49% higher at 1.6185 against the Loonie during the early noon hours Friday but has fallen 6% in the last three months and is down 7.01% for 2019. Theoret has been looking in recent weeks for the exchange rate to decline as far as 1.57, which might yet happen if some other forecasts for the Pound are correct. Analysts are increasingly expected the final quarter to augur either a 'no deal' Brexit or a damaging general election. 

Speculation pointing toward an administration of 'national unity' had been building since early on Thursday and helping the Pound to claw back ground previously lost to the Canadian Dollar, although Sterling has also been aided higher by a strong set of retail sales figures for July that prompted some economists to declare the UK will avoid a technical recession this year. 

"We are still short of the downside “overshoot” target (1.57) we thought might be tested following the achievement of out 1.61 bear target and we might have to allow the GBP some time to consolidate or even strengthen in the near-term after eight weeks of consecutive GBP losses," Theoret says. "We are not convinced that a major low is in for this market at this point."

Above: Pound-to-Canadian-Dollar rate at daily intervals, and GBP/USD rate (black line, left axis).

Shaun Osborne, Theoret's colleague and Scotiabank's chief FX strategist, says the opposition idea of a caretaker government is "unlikely to fly" and that the Pound is likely to soon meet resistance to its climb higher. He's not alone either because analyst forecasts for Sterling heading into year-end have turned increasingly pessimistic in recent months.

The spectre of a 'no deal' Brexit has always been a heavy weight for Sterling to carry but the market's aversion to it is being made stronger by the weak condition of the global economy, which is suffering amid the U.S. trade war with China. The Eurozone economy, which is of significant importance to UK trade, is also struggling due to the fallout in China from the tariff fight with the U.S.

Theoret is still anticipating further losses for the Pound in the short-term, based upon his studies of trends and momentum on the charts, but Scotiabank forecasts the Pound-to-Canadian-Dollar rate will finish the 2019 year at 1.6025, close to its Friday level. Analysts at Commerzbank forecast the exchange rate will end 2019 slightly higher than Friday's level, at 1.62, although that assumes the UK avoids a 'no deal' Brexit.

"The current GBP levels reflect a higher likelihood of a no deal scenario, but are not likely to have fully priced in this scenario yet," warns Antje Praefcke, an analyst at Commerzbank. "If we really do see a no deal Brexit at the end of October we might well see a further 10% GBP depreciation. Possibly even more, as a sudden pronounced slide can easily become self-reinforcing in the FX market’s current state."

  

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