Canadian Dollar Forecast to Charge Back to 1.95 Against the Pound

The Canadian dollar has failed to press its late-February advantage against pound sterling; the result is GBP/CAD is looking to break a few big figures higher

• Scotiabank see potential for a move back to 1.95 in GBP/CAD
• However, Pound Sterling Live see 66% chance the pair will close lower this week

The CAD is soft at present and has fallen in tandem with oil prices ahead of key risk events later this week.

All eyes are on Wednesday’s FOMC and Friday’s Canadian retail sales and inflation numbers.

CAD continues to be driven by oil and the broader tone of risk appetite, leaving it vulnerable to turbulence surrounding Wednesday’s Fed meeting.

The pound saw some eye-watering declines against the Canadian dollar in February as GBP weakness combined with an all-round recovery in CAD to make this cross one of the worst performing in G10.

However selling interest dried up at 1.87 and the exchange rate was unable to be pushed any lower.

The ensuing recovery has meanwhile shown a pattern of higher lows and higher highs.

"A consideration of the decline from mid-January would suggest near term resistance at 1.92, just above Thursday’s high," says Shaun Osborne at Scotiabank, "A break of this level would open up the risk of a rally toward 1.95."

However, Scotiabank caution they maintain our bearish medium-term view and look to the April 2015 lows around 1.8150.

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.

 

66% Chance GBP/CAD Will Close Lower This Week

The pound to Canadian dollar exchange rate's chart is showing there is probably a 66% chance the week ahead will close lower than the level at which it opened.

The exchange rate has formed two up-weeks in the midst of a steep down-trend, producing a signal that the next week will probably on balance actually be a down-candle.

The heightened probability of a continuation lower provides a backdrop against which analysis can be evaluated and may help traders to position themselves in line with favourable odds.

There is also a possibility that the exchange rate could fall all the way down to its next target at 1.8511 which corresponds to the 100% extrapolation of the height of the double top pattern lower (see chart).

A double top is a reversal pattern which forms at the end of up-trends, when prices rise to a peak pull-back and then rise again to form another peak, before breaking lower and extending their trend down.

If the pattern breaks lower, it is normally expected to reach 61.8% of the height reflected down form the neckline, as a bare minimum – but often reaches as far as 100% or further.

GBP/CAD has reached as far as 61.8% and there is a possibility it could fall even lower to the 100% target at 1.8511, however, for confirmation of such a move I would ideally like to see a break below the 1.8673 lows.

Crude Oil Price Outlook: Nearing Resistance at 200-day Moving Average  

The Canadian dollar continues to show a high correlation to the price of oil price which is rising, with Brent now above $40 per barrel and WTI at $39.

"Oil in particular, which is down nearly 3.0% overnight, is dragging the loonie lower. While the CAD has enjoyed a massive rally over the past few weeks, its outlook remains inextricably tied to the direction of crude oil," say Commonwealth Foreign Exchange in a briefing to clients on Monday.

WTI is in a fairly strong up-trend, but it has almost reached its 200-day MA at $40.59, and if it does then there is a good chance it will at the very least pause, pull-back or consolidate at that level. There is also the possibility of a complete reversal too.

The observation that Crude is nearing a major resistance level which is likely to slow down its rally and possibly even lead to a correction or reversal indicates the possibility of weakness, or at least a lack of strength in the Canadian Dollar.

Oddly this slightly contradicts the signal from the weekly charts that next week is likely to be a bearish week for GBP/CAD, unless the weakness is supplied predominantly by the pound, or oil simply breaks above the 200-day on surprise news, such as an Opec deal to cut production. 

Commonwealth Foreign Exchange would argue that oil's luck is soon to run out:

"Given the global glut of crude oil, a meaningful rally higher in energy prices looks unlikely. Consequent, the Canadian dollar’s recent gains could prove short-lived."

Outlook for Canadian Fundamentals

The main concern for analysts apart from whether the rally in oil will extend higher, is whether the strengthening Canadian dollar - which has risen from 1.46 to 1.32 in less than two months - could now be so strong it might be stymying the economic recovery. This could be acting as a counter-balancing force against its own further gains.

Big hopes are riding on the March 22 Federal Budget which is expected to be pro-stimulus, and some economists are predicting this should further support the Canadian Dollar looking forward, indeed this is the corner-stone of David Bloom of HSBC’s forecast of USD/CAD in the 1.25 by year end.

In terms of nearer term factors, data out in the week ahead falls heavily on Friday, when Retail Sales in January will be released (-2.2% prev) , February CPI (0.2% mom and 2.0% yoy prev), and BOC Price Index Core (-0.3% mom and 2.0% yoy prev).