Pound-to-Canadian Dollar Forecast Higher as Downtrend Fades

Canadian Dollar outlook

Image © Adobe Stock

- GBP/CAD can add to gains

- Longer-term measured move completes

- Canadian Dollar to be moved by GDP data

The GBP/CAD exchange rate is trading at around 1.6284 at the time of writing, which is 0.5% higher than where it started the day.

Gains come amidst a broad-based rally in Sterling with the Brexit pendulum swinging back towards expectation that a 'no deal' Brexit can be avoided at the end of October.

"Sterling trading higher again today," says Neil Jones, a trader at Mizuho Bank, "I suggest on reports indicating the opposition will look to form a plan into law starting today, to stop a no deal on the 31st October or rather deal A50. The sense is in the market, the measure would be more likely to succeed rather than a vote of no confidence to topple Boris Johnson."

The move higher in Sterling dovetails with our latest suite of technical studies of the GBP/CAD charts, which shows the pair has probably reversed its medium-term downtrend after basing at the August 9 lows.

The 4 hour chart - used to determine the short-term outlook, which includes the coming week or next 5 days - shows the pair has broken out of a downtrend and has the potential to go higher.

GBP to CAD four hour chart

One of the signs that this may be so is that it has begun a new sequence of rising peaks and troughs. Given the maxim that ‘the trend is your friend’ this new uptrend is biased to continue.

The pair has pulled back a little this morning and the August 7 highs now present a ceiling of resistance which needs to be broken back above to confirm further upside.

A break above the 1.6260 would provide added confirmation of more upside to a target at the 1.6370 highs.

The daily chart shows how the pair bottomed at the August 9 lows before starting to recover. Then it rose up and touched the 50-day moving average (MA) at 1.6309 before pulling back.

Daily GBPCAD

GBP/CAD will probably continue to rally higher, although we would ideally wish to see a break above the 1.6373 highs for confirmation of more upside to a target at 1.6595 and the August 2018 lows.

The RSI momentum indicator is rising strongly and is at the same level as it was when the exchange rate was in the 1.70s, which is a bullish sign for the exchange rate.

The daily chart is used to give us an indication of the outlook for the medium-term, defined as the next week to a month ahead.

The weekly chart - used to give us an idea of the longer-term outlook, which includes the next few months - shows the pair having completed a ‘measured move’ which began at the 2018 highs.

Weekly GBPCAD

The pattern is now probably complete as the final c-d leg has reached the same length as the a-b leg.

The fact the RSI momentum indicator has just exited the oversold zone and is rising strongly is a buy signal for the pair and indicates the likelihood of more upside on the horizon, and in the long-term, a rise up to a target at 1.7000 is possible.

BannerTime to move your money? Get 3-5% more currency than your bank would offer by using the services of foreign exchange specialists at RationalFX. A specialist broker can deliver you an exchange rate closer to the real market rate, thereby saving you substantial quantities of currency. Find out more here.

* Advertisement

The Canadian Dollar: Key Events to Watch

The main releases for the Canadian Dollar in the week ahead are GDP data out on Friday and the level of the current account out on Thursday.

Q2 GDP is forecast to show a rise of 3.0% annualised and 0.1% on a quarterly basis, from 0.4% and 0.2% respectively in the previous quarter, when it is released at 13.30 BST on Friday.

Generally, investors prefer currencies backed by a strong economy so an above-expectation result would help support the Canadian Dollar and vice versa for a below-expectations result.

TD Securities, a Canadian investment bank, is even more optimistic about Q2 GDP than the consensus and expects the official forecast to be bettered, mainly due to a rise in exports, which suggests Canada remains untouched by global trade tensions.

“The Canadian economy likely turned in a solid performance in the second quarter, with our final growth tracking 3.3% (q/q, annualised),” says TD Securities. “Much of the acceleration can be put down to two key areas. The first is international trade, where a solid advance in exports (+10.7%) is expected, alongside a contraction in imports (-0.5%). The second is residential investment, which is expected to break its five-quarter contractionary streak with a 12% gain, helped by robust gains in both resale and construction activity.“

Wells Fargo, a U.S. investment bank, meanwhile, sees robust Canadian oil prices supporting GDP growth in 2019.

“Global oil prices have rebounded in 2019, while authorities have unwound some of the oil production cuts in the Alberta region, helping the economy stabilise and start to strengthen over the course of the year. While oil production cuts are likely to stay in place for the time being, we expect oil prices to remain around current to slightly higher levels, which should help Canada’s oil sector positively contribute to quarterly GDP growth in the second quarter,” says Wells Fargo.

Furthermore, they cite strong monthly GDP data as being key and other indicators of economic activity which have also improved.

Wells Fargo’s own GDP forecasts for Canada are for the economy to grow 1.3% in 2019, and 1.8% in 2020. “A stronger economy should also keep the BoC on hold for now,” Says the bank.

The Canadian current account is expected to show a CA$-9.8bn fall in Q2 from CA$-17.4bn previously when the data is released at 13.30 BST on Thursday.

The current account (CA), which is part of a country’s balance of trade, can also sometimes impact on its currency, although usually only over the long-term.

The bigger the CA surplus, the better it is for the currency, whilst a deepening deficit is negative for a currency.

BannerTime to move your money? Get 3-5% more currency than your bank would offer by using the services of foreign exchange specialists at RationalFX. A specialist broker can deliver you an exchange rate closer to the real market rate, thereby saving you substantial quantities of currency. Find out more here.

* Advertisement