While the value of the GBP to CAD exchange rate continues to rise we are wary of just how far the advance may extend.
The Canadian dollar is not enjoying itself at the moment - with oil’s capitulation lower weighing the reporting of weaker than expected employment data for April was the last thing those hoping for a stronger CAD needed.
Canadian unemployment has actually increased to the tune of 2.1K people, markets had been expecting an increase in employment by 1K people.
The labour market figures follow the equally poort news that Canada reported earlier this week that the country experienced its worst trade deficit ever as exports hit the lowest level in more the 2 years.
Deterioration in the March 2016 trade deficit resulted from exports dropping by $2.1 billion (4.8%) tempered by imports declining by $1.1 billion (2.4%).
While some commentators have suggested the trade data is an open invitation to an interest rate cut at the Bank of Canada it is worth noting that the Bank’s most recent forecast assumed even greater slowing in growth in the current quarter to 1%.
As such, "we expect the central bank to hold policy unchanged in the near term while awaiting confirmation of this outlook," says Paul Ferley, Assistant Chief Economist at RBC Economics.
So while there is no immediate BoC-inspired threat to CAD, there is evidence that economic numbers may be headed in the wrong direction.
Overvalued Canadian Currency Losing Ground to the Pound
Indeed, we reported here that a number of analysts had begun to see the Canadian dollar as overvalued on a number of metrics back in late April. The turnaround in the currency's fortunes confirms the market is now in agreement.
The pound sterling has managed to take full advantage of the CAD's hesitancy and advance above a noted resistance point thanks to the data.
GBP/CAD now sits at 1.8615, above the pair’s 50 day moving average. This signifies momentum and sentiment in the market has turned positive over the medium-term:
We saw back in January that this area provided good support to any sterling weakness and it could well be that declines will now be protected by this level as traders look to buy into dips.
With regards to potential targets the obvious choice would have to be the 100 day moving average up at 1.92.
We are seeing the GBP/AUD exchange rate currently failing to advance beyond its 100 day moving average, maybe the same will be true for its fellow commodity currency?
“GBPCAD is extending the May recovery though the 1.85 area, taking out trend resistance off the 2.09 high and 40-day MA at 1.8531 in the process. The force appears strong in this one now,” says analyst Shaun Osborne at Scotiabank.
Osborne notes downside risks for the cross are moderating and that a strong close to the previous week - above 1.85 - should add to upward pressure on the GBP as it would reflect the highest close in a month and likely tempt trend followers to jump on the long side of the trade and encourage short position holders to cover.
“Technical evidence of a strong reversal remains absent but a moderation/consolidation in the sell off seen since January looks a reasonable expectation now and may allow the GBP to rise towards 1.88/1.90,” says Osborne.
Forecasting a Poor May for the CAD
Analysts are looking for Canadian employment to grow a meagre 1K when the data is released on the 5th. This represents a notable decline from a previous reading of 40.6K and highlights were sentiment is headed.
CIBC Capital Markets' rates strategist, Richard Gilhooly has recommended entering a long 5 year CAD trade vs the US at -48bp, looking for a reversal back towards -65bp and levels seen at the end of March (when USD CAD was trading nearer 1.32).
The rationale is that CAD growth looks likely to decelerate after a strong start to the year, in contrast to that in the US.
Gilhooly argues that the recent run up in the CAD and compression in spreads was overdone and continues to be ripe for reversal.
Regarding the outlook for the US to Canadian dollar exchange rate, CIBC's Jeremy Stretch says in the near term we should expect 1.2875 to provide resistance ahead of 1.2925 and above there1.2990.
"Expect continued good buying interest back towards 1.2800/10. Only a close below 1.2750 would question maintaining a topside bias into the labour market data," says Stretch.