Pound's Advance Against Canadian Dollar Forecast to Moderate Over Coming Days

Having rallied over recent days the GBP to CAD exchange rate is turning increasingly confident but we do warn that a period of consolidation could be on the cards.

Of late, pound sterling has shot higher to reach its best rate of exchange against the Canadian dollar since February at 1.9155.

This is the first time in weeks that those with Canadian dollar-based payments can exchange in the 1.8973 - 1.8839 region.

While those watching the market will likely be anticipating a 2.0 exchange rate once more we would caution that this market’s acceleration higher is looking a little over-stretched at the present time.

GBP/CAD’s sharp rise from the 1.85s at the start of the week to the current 1.91s leaves the exchange rate looking overbought on the daily charts.

The pair’s Relative Strength Index (RSI) now reads at 78.0. The RSI is the ‘go-to’ indicator when trying to ascertain whether a move has become unsustainable.

Anything above 70 is indicative of overbought conditions while anything below 30 is indicative of oversold conditions. Levels above 75 are rare, confirming just how overbought GBP/CAD now is.

Latest Pound / Canadian Dollar Exchange Rates

	Live: 1.8597▼ -0.02% 12 Month Best: 1.8915
*Your Bank's Retail Rate	1.7965 - 1.8039
**Independent Specialist	1.8337 - 1.8411 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

The last time we saw such conditions was in 2014 and the pair went onto form a sideways-orientated consolidation to settle conditions.

This could be the fate of sterling-lonnie over coming weeks, particularly if we consider that the driving force behind the British pound is a fundamentally hard to predict driver - the intentions of the British public with regards to their vote at the June EU referendum.

"The early May congestion range has been resolved with an upside break, however we are cautious about the near term outlook and note  the potential for considerable near-term resistance at 1.90," says technical analyst Shaun Osborne at Scotiabank.

Note that the GBP/CAD, like a number of other GBP pairs has broken above the 100 day moving average.

In the past such a move has been quite instructive to future price action as it signals the clearing out from the market of selling interest by speculators looking to bet on a reversal.

Now that GBP/CAD has broken above the 100 day moving average there is the chance that it will have the freedom to attack the 2.0 level. Again though, we are concerned that the pair is looking overbought on the charts.

Above: The RSI in the bottom pane suggests GBP/CAD is overbought, the break of the 100 day M.A in the top pane advocates for further advances. There is potentially further to rise based on the argument that the Brexit premium is yet to be fully closed.

Citi: Buy GBP/CAD

Backing the pound to advance further against the Canadian dollar are CitiFX whose technical analysts see further gains ahead.

In a note to clients Citi say expressing a desire to own sterling is best done against currencies other than the USD, which continues to trade with strength this May.

"With USD’s resurgence now gaining momentum, the better way to play for sterling’s relative resilience appears to be on crosses (EUR, CHF, AUD & CAD) with our CitiFX Technicals team deciding to go long GBPCAD at 1.8894 targeting the 1.97-1.98 area," say Citi.

The British Pound Erasing its 'Brexit Premium'

The GBP has torn higher this May as markets quickly unwind the so-called Brexit premium - this is the gap between where the pound fell to over fears concerning the EU referendum, and where it should be based on fundamentals.

In short, resilient UK data did not justify the pound trading at levels towards 1.80 against the Canadian dollar.

Now that polls are solidifying in favour of the Remain vote we have seen markets push the GBP higher in a game of catchup.

After a mixed employment report yesterday the currency garnered strong traction on the back of the publication of the IPSOS Mori telephone based opinion poll which put the remain camp well in the ascendancy.

The poll which put the remain camp at 55% vs 37% for exit prompted a round of GBP short covering, “indeed should such poll trends be maintained expect further positive GBP tailwinds,” says Jeremy Stretch at CIBC in London.

GBP Now Overbought: CIBC

Recent Sterling gains have contrasted with the recent weakness in the UK economic surprise index. Having traded year to date lows unexpected resilience in April retail sales, March was also revised up, (that has implications for the revision to Q1 GDP) helped support GBP and help reverse the downtrend in the ESI.  

While there are a number of seasonal distortions around Easter Stretch says he would be wary of extrapolating the uptrend in monthly sales reported by the ONS.

While sales volumes may have increased by 1.5%, looking at the 3m on 3m trend, which is more reflective of long term trends is rather less robust, on that basis the series moderated to 0.7% from 1.1%.

Despite the reversal in the ESI and unexpected consumer resilience, which contrasts with the anecdotal data expect overhead resistance at 1.4670 to contain GBP topside against the US dollar.

“We would regards recent GBP gains as looking increasingly overdone,” says Stretch.