A Canadian Dollar Advance is Possible over Coming Days

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- CAD gains tipped for this week

- TD Securities, RBC Capital Markets look for weaker USD/CAD

- ING eyes 1.30 once into 2020 on economic outperformance.

- Scotiabank says GBP move looks like a correction, not a recovery. 

The Canadian Dollar has fallen against the Pound and U.S. Dollar over the course of the past 24 hours, but is being tipped by analysts to advance over the coming days on a combination of technical as well as macroeconomic factors. 

Canada's Dollar was lower against a recovering Pound after opposition MPs claimed to have a plan that will prevent a 'no deal' Brexit playing out in the Autumn, and that might also see the UK remain in the EU for an unknown period of time after the twice-delayed Brexit date of October 31. 

Meanwhile, the Loonie ceded ground to a U.S. Dollar that was boosted by a consumer confidence report suggesting households are still unfazed by the trade war with China. 

However an improvement in global investor sentiment that could yet aid a recovery in the Canadian Dillar over coming days we are told.

Investor sentiment has improved this week after U.S. President Donald Trump claimed Monday that China recently contacted the U.S. with a request to resume negotiations aimed at ending the trade war between them.

"Yesterday’s rebound in risk sentiment was significant technically as it allowed USD/CAD to pierce uptrend support at 1.3275 on a daily closing basis. This points to a loss of bullish momentum, with the resulting trend reversal shifting the focus down to 1.3185 and 1.3145," says Elsa Lignos at RBC Capital Markets. "We are short EUR/CAD in our thematic trade of the week."

Above: USD/CAD rate shown at 4-hour intervals, alongside GBP/CAD (orange line, left axis).

Trump's claim was promptly disputed by China, but that hasn't stopped investors from bidding for so-called risk assets like stocks and commodities including oil. Trump's comments were made at the end of the G7 summit and days after a decision to increase the tariffs charged on imported items from China, a move that was itself a retaliation against a earlier Chinese retaliation. The two sides have been warring with tariffs and other tactics since early 2018. 

China surprised markets Friday by announcing a new 10% tariff will be applied to $75 bn of U.S. goods bought by the country each year, after having left an earlier U.S. tariff decision unanswered for weeks. The ongoing tit-for-tat exchange has stoked fears for the global economy and dealt a blow to so-called risk assets including the price of oil, which Canada's Dollar can often follow.

"One of the positive things on the CAD side rests on the fact that it still scores well on our growth indicators (forecasts and data surprises). And yet it again screens cheap," says Mark McCormick  at TD Securities. "Our High-Frequency-Fair-Value gauge suggests we should hit 1.315 over the coming days, though we see little scope to make a convincing break much lower." 

Trump's apparent change of tone has driven a recovery in risk assets that also bodes well for commodity-backed currencies like the Canadian Dollar. McCormick says the Loonie scores well on TD's own proprietary measures of the growth outlook and that the U.S. Dollar is close to being at the bottom of the pack, although he's cautious about the longer-term outlook.

Above: TD Securities graph showing currency returns (black dots) Vs growth forecast revisions. 

McCormick told clients in a research note Tuesday that the Canadian Dollar can perform strongly provided fears for the global economy are kept at bay, and he's not alone either because strategists at Netherlands-based ING Bank have also recently tipped the Loonie for a continued strong performance in the weeks and months ahead.

"We expect CAD to be the most attractive currency to play a rebound in sentiment, as strong labour and inflation outlooks should contain BoC easing to one cut in 4Q19, which is mostly priced in. We may see USD/CAD below 1.30 at the start of 2020," says Francesco Pesole, a strategist at ING. 

The U.S. greenback is not the only currency the Canadian Dollar has been tipped this week to soon get the better of, because Scotiabank said Tuesday that further gains for Pound Sterling will be limited until the Brexit issue is resolved - which could be quite some time.

Scotiabank's Eric Theoret, who studies trends and momentum on the charts rather than fundamental factors around Brexit and the economy, says the earlier rise seen by the Pound-to-Canadian-Dollar rate looks like a simple upward correction rather than the beginning of an extended recovery.

"While the GBP has sustained the break above trend channel and 40-day moving-average resistance, gains are still more corrective (possible bear flag or wedge pattern) than outright bullish," says Theoret says. "Moreover, there are signs that the rebound is faltering, with the GBP forming a bearish “evening star” reversal around the initial (23.6%) Fib retracement of the 1.78/1.59 move down at 1.6317. Loss of support at 1.6160/65 would be a more significant indication of renewed weakness." 

Above: USD/CAD rate shown at daily intervals, alongside GBP/CAD (orange line, left axis).

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