Image © Bank of Canada
- GBP/CAD rate risks a short-term pullback this week.
- USD/CAD seen lower as GBP/USD tracking sideways.
- Will weigh on GBP/CAD rate but only in the short-term.
- GBP is consolidating, still has eyes on March 2019 high.
- Election polls drive GBP as CAD eyes CPI and retail data.
The Pound-to-Canadian-Dollar rate risks dipping lower through the opening stage of the new week but the uptrend that was born back in August is still intact and continues to point the exchange rate in the direction of its March 2019 high.
Sterling will struggle to get the better of the Loonie this week because both are tipped by Scotiabank to tread relatively narrow ranges against the U.S. Dollar, with little likely impetus for a strong move in either direction. The Pound-to-Canadian-Dollar rate did however, rise almost 1% last week before being road-blocked for a third time by 'resistance' around 1.7050 on the charts.
"Our week-ahead predictive model implies a broad range trade around 1.3250 over the coming week; soft data and more dovish BoC comments will tilt the risk for USDCAD towards 1.3350. Positive data should put 1.3150 on the radar for early Dec," says Juan Manuel Herrera, a strategist at Scotiabank. "Sterling has steadied around the 50% retracement mark of 1.2872...it faces near-term resistance at 1.2900. GBPUSD downside looks supported by the mid-week range around 1.2840-1.2850."
USD/CAD is likely to remain under pressure in the weeks ahead as the greenback softens, Herrera says. He estimates there's around 70 points worth of USD/CAD downside that can play out in that time, which is all upside for the Loonie. Sterling on the other hand, is knocking on the door of resistance on the GBP/USD charts and so may have gone as high as it's likely to for now.
"Intraday patterns suggest a peak is “in” and that more pressure may bear on short term support at 1.3220 (trigger for a further 50 pip drop on a break below here). Daily and weekly price signals are tilting more clearly USD-bearish as well. Charts suggest increasing, negative technical pressure on the USD and we think loss of support in the low 1.32s (note the 40-day MA support stands at 1.3205) will open up the downside for USDCAD towards congestion support at 1.3140/50," Herrera writes, in a research note last week.
This isn't the greatest news for Sterling because if the GBP/USD rate is stalling at the same time as USD/CAD is falling then it's normally enough to produce a downward lurch in the Pound-to-Canadian-Dollar rate, which can be calculated at its most basic level by dividing GBP/USD over CAD/USD.
Above: GBP/CAD rate at hourly intervals, alongside GBP/USD (orange line, left axis) and CAD/USD (blue line, left axis).
Lurching downward could well be how the exchange rate spends the duration of the coming days, although the weakness should be short-lived.
"We look for support around 1.69 and stronger support at 1.6695/00. We still think a push through the upper 1.70 area will lift the cross to 1.73/1.74 initially and point to an eventual retest of the 1.78 level," Herrera says, referring to the Pound-Canadian Dollar rate.
Scotiabank says the charts are suggesting the Pound-to-Canadian-Dollar rate will return to the now-lofty heights of March 2019, which was a month that brought with it the beginning of a steep downturn for most British exchange rates. Since then ongoing uncertainty over the UK's EU-exit pathway as well as future trade arrangements with some of its largest markets, have weighed heavily in UK interest rate expectations and the Pound.
Herrera tipped 1.78 as a prospect earlier in November, a level that implied 5% upside for the exchange rate at the time but which suggested on Monday, a modestly lesser increase of 4.4%. Sterling is still down against the Canadian Dollar for the year overall even though it has risen by 6.13% during the three months to the middle of November, which highlights the extent to which a strong Canadian economy and Dollar, not to mention Brexit, had weighed on the exchange rate earlier this year.
Above: Pound-to-Canadian-Dollar rate shown at daily intervals.
The Canadian Dollar: What to Watch
Canada's Dollar ceded ground to Pound Sterling last week and was unchanged against the U.S. Dollar after rising trade tensions and falling oil prices prevented it from capitalising on a weakening greenback.
The main event for the Canadian Dollar in the week ahead will be the publication of inflation data for the month of October and retail sales figures covering the month of September, both of which could have implications for the Bank of Canada (BoC) interest rate outlook and trajectory of the Loonie.
Wednesday's inflation figures, due out at 13:30, will help investors gauge the extent to which the BoC might have scope to reduce its cash rate over the coming months.
The bank hinted strongly in October that it might cut rates in the months ahead to provide the Canadian economy with some insurance against the disinflationary threat that is the global economic downturn, although the BoC even now has to tread a fine line between safeguarding the economic outlook and delivering its inflation target.
Canada's main inflation rate and the BoC's three different measures of 'core' inflation have all sat close to, if not bang on, the 2% target through most of this year so the BoC would risk stoking above-target price pressures if it does cut its interest rate while the headline and core inflation rates near their current levels.
"Any negative surprise in the inflation data will increase speculation of a cut in December’s meeting," says Ranko Berich, head of market analysis at Monex Europe. "Fixed income markets are only pricing a 16% probability of a rate cut in December, with a 44% probability of policy easing at the January 22nd meeting. Should the inflation measures, specifically the core inflation measures, show any signs of dipping below the 2.0% target, fixed income markets will raise the probability of a rate cut in 2019."
If Canada's inflation numbers decline for the month of October they would be seen by the market as suggesting that price pressures are cooling, potentially providing the BoC with the cover it needs in order to cut rates. That would be bad for the Canadian Dollar because financial markets are a long way from having priced-in a rate cut from the BoC for any point in the near future.
However, and on the opposite side of the same coin, an upside surprise in Wednesday's numbers might lead investors to conclude that a rate cut remains unlikely, potentially offering support to the Loonie. BoC Governor Stephen Poloz will deliver a speech about "economic change and the path forward at the Ontario Securities Commission at 13:40 Thursday. Market will listen closely to the address in the hope of garnering clues on Poloz's policy views.
"Retail Sales data is the data highlight for next week. Recall that consumer spending was noted as one of the “sources of resilience” in the economy that the BoC said it would be monitoring as it considered monetary policy settings (the other being housing)," says Sean Osborne, chief FX strategist at Scotiabank. "Stable (near target) CPI and decent (or not disastrous) Retail Sales results may further dampen near-term rate cut expectations."
Pound Sterling: What to Watch
Ebbing and flowing polling numbers are to remain the single greatest influence on the Pound over the coming days with economic data lonce again taking a back seat. This means the first televised leadership debate due on Tuesday will be an important moment for the Pound.
Prime Minister Johnson will go head-to-head with opposition Labour Party leader Jeremy Corbyn in a televised debate Tuesday and with neither party's manifesto expected before the weekend, it's likely that talk of rival visions for a post-Brexit UK will dominate the discussion. Investors and analysts will be looking to see Johnson emerge from the debate without his polling lead, which some firms estimate to be as high as 12%, intact.
A Conservative majority would enable the Prime Minister to take the UK out of the EU with an agreement that averts a 'no deal' Brexit and provides businesses with certainty about the country's trade arrangements over the coming years. That would also keep the opposition Labour Party and its controversial policy agenda from the doors of 10 Downing Street and possibly even slow the decline in business investment that's been ongoing since the referendum.
"EUR/GBP has been gradually grinding lower over the past week. The pound’s outperformance primarily reflects building optimism that the Tories will win a majority at the upcoming election," says Derek Halpenny, head of research, global markets EMEA & international securities at MUFG. "The gap though between the Tories and Labour would have to narrow materially to create more election uncertainty and weaken the pound. Market optimism over a potential end to the Brexit deadlock in parliament has allowed the pound to weather the softening UK economic data flow over the past week."
Retail sales fell by 0.1% in October, Office for National Statistics data revealed, when markets were looking for them the rise. Falling sales volumes on the high street in October could mean the economy saw a slow start to the final quarter. Meanwhile, other figures showed UK inflation pressures in retreat last month, providing the Bank of England (BoE) with time to sit on its hands and observe developments in the Brexit process.
CBI Industrial Order Expectations figures are out on Tuesday at 11:00 and the latest public sector net borrowing numbers will be out on Thursday at 0930, although investors will likely be more focused on Westminster.
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