GBP/CAD Recovery Could Continue, But Oil Debate is Key to Longer-Term Outlook

Sweden's SEB have analysed the oil markets and warn the likely trajectory of oil prices hints at a return to weakness for the Canadian Dollar.

This suggests that we may have seen the worst pass for the under-fire pound to Canadian dollar exchange rate. 

The GBP to CAD conversion has shaken aside some dire economic data this week to extend its fledgling recovery.

The move is however most likely a technical one in which hefty bets against the pound have been unwound. Impetus for the move going forward would most likely rest with happenings on the CAD side of the equation.

At the time of writing we see the GBP to CAD exchange rate trading at 1.8977, its best exchange rate in a week.

Latest Pound / Canadian Dollar Exchange Rates

	Live: 1.8615▲ + 0.07% 12 Month Best: 1.8915
*Your Bank's Retail Rate	1.7982 - 1.8056
**Independent Specialist	1.8354 - 1.8429 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Our Forecast Targets

Our analysis made over recent weeks has proven spot-on forecasting moves in the GBP/CAD and we now believe the move lower may be nearing an end with our initial targets having been reached.

The weekly chart shows that the GBP/CAD pair has reached the minimum down-side target calculated from the double-top reversal pattern, at 1.8977.

Double tops are patterns which occur at the end of bull trends and mark reversals of the trend.

They are formed when the market peaks, falls back and then peaks again at a similar level to the first peak – painting on the chart what is essentially a ‘double top’.

The price is then expected to fall steeply to a target at the 100% extension of the height of the pattern lower.

The neckline is at the low of the intervening trough of the pattern; it must be breached to confirm more downside and in order to validate the pattern.

The minimum target is at the 61.8% extrapolation- rather than the 100% - due to the significant properties the 61.8% ratio discovered by the Italian Mathematician Fibonacci.

Since the minimum target on GBP/CAD has been met (at 1.8977), it lessens the chance of more downside, and increases the chances of either a consolidation or recovery.

Such a move would dovetail neatly with SEB’s bearish oil analysis.

The one fly in the ointment to this view, is MACD indicator in the bottom pain, (a momentum indicator) which remains in bearish territory, but nor is that a game changer either. 

Death Cross

One stronger signal that the recovery may not come to pass, however, is the potential Death Cross forming on the daily chart.

A Death Cross happens when the 50-day MA moves below the 200-day MA when both are declining.

It is a very bearish medium-term signal, and we are millimetres away from forming one on GBP/CAD.

Also, the pair may have fulfilled the 61.8% minimum target from the double top, but it still has not met the 100% target at 1.8520ish, and there is a still candle-lit possibility that it will.

So for intrepid bears willing to front some risk, a break below the 1.8650 level would confirm a move down to 1.8520 at the 100% target, especially as it will be complemented by the Death Cross.

Oil Price Trajectory is Key Risk to CAD

There are also reasons to believe the Canadian dollar may be at risk to a return to lower oil prices.

Scandinavian lender S.E.B sees oil prices falling back down to $30 per barrel near term which will probably weigh on CAD owing to the tight relationship between the two assets.

The Canadian dollar is one of the most sensitive currencies to the price of oil and therefore its highly likely that if the commodity weakens it too will fall in tandem.

Black gold will probably return to $30 as a result of continued rising global supply, writes Erica Blomgren, the author of the SEB note:

“The oil market is still running a solid surplus and global oil inventories are still rising robustly. Hence, we see downside risks dominating in the near-term with a test of low 30ish $/b in the spot and the curve to move back to a deeper contango again.”

Blomgren dismisses as secondary current themes pushing oil higher, such as OPEC-Russia talks, declining U.S crude production (which has fallen for the last 6-weeks), falling gasoline stocks, a rise in speculative long trades and falling Rig Counts.

The bank does, however, see the commodity eventually bouncing back to $40 per barrel:

“Oil prices should recover later this year and we forecast an average Brent crude oil price of USD 40/b in 2016.”

Overestimating the Supply Side Surplus

Firing back at SEB with a counter-argument are SP Angel - the boutique brokerage in London.

Analysts say that market assumptions on oversupply are faulty.

"The perceived 'supply overcapacity' there has been in the market, ultimately the natural decline curve, coupled with the shelving of investment in new production, will see that situation reversed quickly," says a note from SP Angel's Oil and Gas team.

There are so many variables that impact the oil price, but SP Angel's contention is that the supply side isn't as robust as people believe it is, and this is only exacerbated the further out you look.

SP Angel believe that the recent oil price strength is the start of that process.

"It shows, in a small part at least, that the effect of the decline in rig utilisation rates is beginning to have a marked impact on the relatively higher decline rate unconventional production, which needs regular intervention to maintain production rates, or offset the high initial decline rates," says the note.

However, analysts concede that judging movements in the demand side of the equation is not easy at this stage.

"Whilst we cannot rule out further downward legs in the oil price, we do believe that the current oil price environment will be seen as the downward leg of what generally will be an upward progression," say SP Angel.