- GBP nears crucial support level on charts as risk mount.
- GBP/CAD must hold 1.71 to keep six-month uptrend alive.
- Outlook hinged on if key GBP/USD, USD/CAD levels hold.
- As GBP/USD tipped for more declines in the week ahead.
- USD/CAD respects 1.33 resistance but risks a break above.
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The Pound-to-Canadian Dollar rate fell almost two percent last week amid moves that have placed a question mark over the six-month uptrend on the charts, and the exchange rate now needs the Loonie to weaken if Sterling is to retain its upside impetus.
Sterling was the worst performing major currency last week amid confrontational rhetoric that's revived the market’s ‘no deal’ Brexit concerns at a point when prior gains had left the British currency vulnerable to a correction. Dollar strength, driven by U.S. economic outperformance and risk aversion in the market, was also at play and will remain an important factor in the days ahead.
Meanwhile, Canada's Dollar ceded ground to some rivals on Friday as oil prices corrected lower but it was otherwise one of the week's better performers given a days-long recovery of investor appetittes for risk assets including barrels of oil. However, the price of oil is highly volatile double-edged sword that will prove to be either a boon or a burden for the Canadian currency in the week ahead.
The culmination of price action in the two saw the Pound-to-Canadian Dollar rate under pressure through much of last week although Sterling's slide was exacerbated at the last minute in moves that dragged the British currency down to a key technical support level at 1.71.
Above: Pound-to-Canadian Dollar rate shown at hourly intervals.
Whether the 1.71 level remains intact will be an important determinant of price action over the medium-term.
"We have this month revised the whole profile for GBP lower, with the trough against USD and EUR in the autumn of this year. Even the gentle recovery penciled in thereafter leaves forecasts below current spot for the whole profile," says Adam Cole, chief FX strategist at RBC Capital Markets.
Cole forecasts the Pound will soon succumb to the overtures of a resilient Loonie and tips the Pound-Canadian Dollar rate to finish the quarter down at 1.69. He and the RBC team forecast another bad year that's seen putting Sterling back at 1.63 by the end of June and 1.60 in September.
Above: Pound-to-Canadian Dollar rate shown at 4-hour intervals.
The Pound-to-Canadian Dollar rate is battling to sustain a six-month uptrend and although it remains an open question as to whether it will ultimately prevail, the relative outlook for price action in the GBP/USD and USD/CAD rates can provide an indication of what might be in store on the path ahead.
This is because the exchange rate always closely matches the sum of GBP/USD over CAD/USD so can be characterised as a bit of a race between Sterling and the Loonie, against the U.S. greenback.
In other words, Sterling’s Friday break below the 1.29 support level against the U.S. Dollar has the potential to portend more losses for the GBP/CAD rate over the coming days unless the move is offset by a simultaneous climb above by the USD/CAD rate above a nearby resistance level at 1.33.
Above: Pound-to-Canadian Dollar rate shown at daily intervals.
“The US dollar is at it again, but at it in slow-motion as it pushes to new local highs in several places without showing much momentum, to the frustration of momentum traders everywhere. Today we focus most on GBPUSD downside risks,” says John Hardy, head of FX strategy at Saxo Bank. "GBPUSD has broken lower as of this writing. Among other USD pairs within the G10, USDCAD is poised right at resistance."
Saxo Bank's Breakout Monitor has identified Sterling as a good candidate for short-selling while Hardy advocated on Thursday that clients bet on a fall from 1.2960 to 1.2710 against the U.S. Dollar. The bank also has a bullish view of the U.S. Dollar across the board and is growing concerned about the outlook for commodity prices in light of the coronavirus outbreak and uncertainty, if not outright doubt, about the reliability of China's disclosures on the matter.
"While we could see a modest push towards 1.3350 in the very short-run, we prefer the risk/ reward of fading rallies on breaks of 1.33 rather than expecting a sharp break higher. It's mean-reversion over momentum for USDCAD in other words. We note that there’s a fair amount of bad news priced into the loonie. USDCAD HFFV, for instance, sits at 1.31," says Mark McCormick, global head of FX strategy at TD Securities.
Pound Sterling: What to Watch
Sterling was the worst performer last week and now faces downside risks against the Euro and Dollar from both the charts and the fundamental side, which will be back in focus with this week's release of final quarter GDP data.
Tuesday at 09:30 marks the release of December GDP figures that are themselves the final piece of a so-far dire fourth quarter puzzle.
Consensus looks for a 0.2% December increase to leave GDP unchanged for the final quarter, which would mark not only a limp rebound from the prior contraction but also a weak finish to a terrible year.
The economy grew 0.1% in October before contracting a sharp 0.3% in November as retail sales shrank even in spite of the Black Friday promotions that are normally a consumer frenzy, while the Brexit-transfixed manufacturing sector offered little support.
"The balance between improving domestic activity and potential hardening negotiations should keep GBP/USD in an effective 1.28-1.32 range," says Tim Riddell, a London-based strategist at Westpac.
Above: Pound-to-Canadian Dollar rate shown at 4-hour intervals alongside GBP/USD rate (black).
November’s data showed the economy growing just 0.6% for the year to the end of that month and Tuesday’s figures could confirm an almost-as-dire picture even if growth does rebound by the 0.2% anticipated.
Such a picture would be problematic for the Pound because it would leave the economy growing beneath its estimated 1% inflation-producing rate of growth at a time when the consumer price index of 1.3% is far below the 2% target.
These growth and price dynamics argue for a Bank of England (BoE) interest rate cut and only some offsetting stimulus, possibly from the March 11 budget, could undermine the case for policy support in the short-term.
Above: Pound-to-Canadian Dollar rate shown at daily intervals alongside GBP/USD rate (black).
"Next week’s GDP data will be important for the MPC. If our estimates are correct, a negative Q4 print won’t just be symbolic (i.e. another contraction) - it will have ramifications for the MPC’s forecasts, which are predicated on a flat reading next week," says Sanjay Raja, an economist at Deutsche Bank. "Positive payback in services and manufacturing activity should support monthly output. Colder weather and heavy precipitation should also see energy and water activity rise. We do, however, anticipate a drop in construction output."
The BoE itself eschewed a rate cut last month because in the aftermath of December’s election it saw scope for an economic recovery in the months ahead, with the decision leading investors to price-out from the market the prospect of a rate cut coming before September. However, a worse than expected growth performance for the final quarter could lead some investors to question that assumption, with implications for Sterling.
U.S. economic data including January retail sales and inflation figures will also be important not only for the Dollar this week but for all other exchange rates because, with the U.S. economy again demonstrating its exceptionalist credentials while the UK and Eurozone economies struggle, the Dollar’s existing interest rate advantage over most of its rivals is becoming further entrenched.
Canadian Dollar: What to Watch
The Canadian Dollar got was among the better performers in a week dominated mostly by an upward correction in so-called risk assets including the price of oil, and with the economic calendar now falling quiet it will be risk appetite that dicates the trajectory of the Loonie in the coming days.
Canada's Dollar will be among the most susceptible to any fresh bouts of risk aversion among investors early in the new week given its correlation with the price of oil, which might fall again on Monday if investors are unnerved by the latest coronavirus declarations from China.
"The world faces its biggest demand shock since 2009. Commodity markets continue to bear the brunt of the coronavirus outbreak in China. While stocks, led by the U.S. technology sector, resumed their rally and reached new highs, the Bloomberg Commodity Index traded lower for a fifth week and down by 6.4% since January 17th when China finally alerted the world about the severity of 2019-nCoV outbreak. We remain concerned that the full impact of the slowdown in China and abroad, with the exception of commodities, is not being properly priced," says Ole Hansen, head of commodity strategy at Saxo Bank.
China’s National Health Commission declared a total of 811 deaths at the weekend, taking the tally above the 774 who died from the Severe-Acute-Respiratory-Syndrome (SARS) in 2002-2003. There are now 37,198 confirmed cases of the disease in China, up from 14,380 at midnight on February 01.
Those numbers make clear that China's fight against the infection is far from over although markets have preferred in recent days to focus on the steadily increasing number of recovered patients and a decline in the growth rates for infections and deaths, even though doing so leaves them exposed to the reliability of the disclosures made.
"The gains in CAD were quickly erased after the jobs data release. However, despite underperforming in line with global risk-sensitive currencies, CAD appeared from the outset less vulnerable than the Antipodeans to the Coronavirus story. At the same time, if market sentiment recovers, the loonie offers a way more attractive carry compared to AUD and NZD," says Francesco Pesole, a strategist at ING.
Above: USD/CAD rate alongside WTI and Brent crude oil prices. Shown at 4-hour intervals.
The Loonie went unrewarded for its healthy January jobs growth on Friday because of a last minute downward correction in the price of oil, the country's largest export, although the currency had otherwise put in a strong performance against many rivals for the week amid an earlier oil price recovery.
Canada created 34.5k new jobs last month, building on a similarly sized increase from December, which helped drive the unemployment rate down from 5.6% to 5.5% when markets were looking for gains of only 16.3k and a jobless rate of 5.7%. The numbers draw a definitive line under the November report that spooked markets with a sharp 40 basis point rise in the jobless rate.
Since December the enigmatic Canadian labour market, often described as a random number generator by some observers, has boggled the minds of investors, economists and BoC policymakers alike.
The tentative situation of workers and households has clouded the outlook for BoC interest rate policy, which has been the single greatest crux of demand and ultimately, support for the Canadian Dollar.
However, market sentiment and demand for different currencies is increasingly being determined by developments in the spread of coronavirus both inside China as well as at the international level.
"The trade-weighted U.S. dollar bounced back in January, gaining almost 1% as risk aversion returned to markets. The spread of the Novel Coronavirus during the month indeed fueled investor concerns about the 2020 global growth outlook. Looking ahead, diverging monetary policies continue to plead in the USD’s favour. That’s not to say, however, the USD can’t see periodic bouts of weakness particularly over the near term as virus-related fears fade and risk-taking returns to markets," says Stefane Marion, chief economist at National Bank of Canada. "Amid the virus-related scare that has gripped markets and sank oil prices, we have pushed to Q2 our target of 1.28 for USDCAD."
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