GBP/CAD: Outlook Turns Positive, 1.90-1.91 Resistance Forecast Next
The British pound has broken above a key barrier which suggests to us an extension of recent strength could continue.
The GBP/CAD enjoyed a strong start to the new week amidst signs that markets are buying sterling in anticipation of a Remain victory with signs that pre-referendum polling is mirroring the shifts in sentiment witnessed ahead of the Scottish referendum.
While the Leave vote has closed the gap on Remain recently, most pundits believe the advantage is too small.
Indeed, over recent days Remain has refound momentum, with the tragic murder of a pro-EU Labour MP, Jo Cox striking, shaking up perceptions towards the vote.
Any hint that Remain will win is a naturally pro-GBP event.
However, the GBP/CAD's longer-term trend was down heading into the new week, the trend being in place ever since the exchange rate rolled over at the late 2015 top.
We noted that standing in the way of the recovery was the confluence of moving averages - the 20, 50 and 100 day MA's were all more or less located in the same place.
This is important as this suggests there is likely to be a heavy build-up of sell orders in the region.
Often markets place buy and sell orders around moving averages in anticipation of a move failing on meeting the moving average.
It is essentially a self-fulfilling prophecy.
It is however worth noting that some pair's are more attuned to their MA's than others.
Regardless of the barriers lying in the way of GBP/CAD's advance, the pro-GBP sentiment witnessed at the start of the week was enough to shatter the barrier:
"We look to the near-term risk of a break above the 100 day MA (1.8855) and highlight the impressive turn in both trend and momentum indicators," says Shaun Osborne, an analyst with TD Securities.
Looking ahead, Osborne notes the potential for considerable resistance above 1.90, a level that roughly coincides with the descending trend line off the January-May highs.
The 38.2% Fibo retracement level of the 2016 decline lies at 1.9138, another level that could see sellers enter the market.
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.
CAD Events to Watch
The commitment of trader's report, which measures futures positions in the currency market, suggests a probable rise for the pound on Monday as the net sell positions on sterling have fallen from the previous week's low, which was itself lower than the week before, forming a pivot, signalling potentially more upside for pound.
By far the most important event in the week ahead is the UK referendum on Thursday June 23.
The main event for the Canadian Dollar is Core Retail Sales in April, which is forecast to show a 0.6% rise from a -0.3% previous reading.
April Retail Sales may give important clues about second quarter growth, according to NBF Economics, who estimate a 0.9% result, which is higher than the 0.6% consensus estimate.
TD Securities also expected a higher-than-forecast result, and point out this will be one of the last data releases before the expected growth-hit from the Alberta wildfires:
"A collection of factors including strong auto sales and rising prices at the pump support TD's above consensus forecast for a 1.2% m/m increase in April retail sales.
This will be one of the last data points ahead of the disruption to growth caused by the wildfires in Northern Alberta"
Crude Oil Inventories on Wednesday June 23 may also impact on the loonie given the pair's close correlation with Oil, which has averaged 78% (0.78) over last 10 years.
USD vs CAD Driven by Global Risk
The extension of the oil rebound at the end of last week has seen USD CAD retreat back below the 50-day MAV, currently at 1.2856.
"A close below the level would suggest that the recent reduction in CAD longs may have temporarily ran their course. Net CAD longs have been pared over the last two weeks, seeing holdings retreat back to the lowest level in almost two months," says Jeremy Stretch, analyst with CIBC Capital Markets.
Although USD/CAD appears set to drift back towards 1.2770/80 in the near term Stretch says he remains biased towards a higher USD/CAD over the medium run, in large part as growth spreads are set to remain in favour of the US.
