Canadian Dollar Forecast to Push Sterling Lower, Inevitable Oil Price Recovery Cited

The GBP to CAD conversion is still ricocheting within a tight range as both currencies come under pressure from their own deteriorating fundamentals.

• Oil price recovery seen into year-end, should provide support for CAD
• Demand for Canadian bonds seen providing support going forward
• Technicals place target at 1.70

The Pound has been rising versus the Canadian Dollar through July until it stalled at a heavy zone of resistance located just above 1.7400.

It has made several attempts to breach 1.74 but has been repulsed each time.

The pattern formed resembles an ascending triangle, which is a bullish pattern, indicating a greater likelihood of a break higher than lower.

Most triangles are composed of five waves, however, this triangle appears to be of the rarer 9 wave variety, and is currently unfolding wave 8 - leaving 9 (or wave ‘i’) still to unfold.

For confirmation that an upside break was progressing look for a move above 1.7480, with a target at 1.7700.

Alternatively, confirmation of a break lower would come from a move below the e wave lows at 1.7100, with a target then at 1.7000.

Despite the triangle’s bullish bias, the longer-term trend is bearish suggesting a strong possibility of a break lower.

Oil Price Recovery Tipped to Boost CAD Into Year-End

An unseasonal surfeit of gasoline, which would normally be guzzled by summer road-trippers but is instead languishing in stockpiled drums, has led to a fall in international crude oil prices. 

This has in turn had the effect of weakening the Canadian dollar (CAD), as CAD remains highly correlated to the commodity, due to energy products accounting for about 16% of Canada's exports in 2015.

Couple this to the bruising Sterling has taken ever since July PMI’s took a tumble on Friday the 22nd of July, and we can understand why GBP/CAD is fast going nowhere.

However, looking ahead, the pound is the most likely to trend lower.

If anything, oil now down to 42 dollars a barrel, actually has potential for a recovery.

Analysts at Bank of America Merrill Lynch (BofAML) are sticking to their year-end forecast of 61 bucks a barrel in their latest global commodities report.

Their three main reasons for being so bullish about oil are as follows:

1. A collapse in global oil related capital expenditure has led to an acceleration in non-OPEC oil field decline rates to 5%, higher than 2009's levels

2. Some OPEC players like Venezuela, Angola, or Algeria have also been affected, so Saudi, Iran, Iraq will have to fill the gap

3. However, Saudi has not yet hiked drilling activity to make up losses elsewhere, so we retain our $61/bbl Brent view for 2017

Latest Pound / Canadian Dollar Exchange Rates

	Live: 1.8608▲ + 0.04% 12 Month Best: 1.8915
*Your Bank's Retail Rate	1.7976 - 1.805
**Independent Specialist	1.8348 - 1.8422 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Assuming the current down-turn in oil is a correction therefore, it’s only a matter of time before crude starts climbing again, and with it the loonie.

BofAML are not the only ones expecting oil to pull itself together, recent analysis has pointed to the recovery in Chinese Financials as a reason to expect a robust near-term for commodities, including oil.

Analysts at Barclays are also forecasting a recovery for crude in Q4:

"Beyond the weak point in Q3, however, India’s oil demand growth is set to accelerate over Q4 again, while China’s is set to moderate. The supply side is adjusting sharply in the backdrop, and an uptick in demand over Q4 is likely to tighten market balances again," says a note from the London-based bank.

Barclays see Brent prices recovering from $45/bbl in Q3 to $50/bbl in Q4 16.

Canadian Dollar Could also be Supported by Demand for Canadian Bonds

A further supporting factor for the Canadian dollar is the current high demand for Canadian sovereign and corporate bonds.

The sudden increase in demand has been driven by the negative yield environment globally which has seen yields from Japan to the United Kingdom fall below zero.

In their search for anything yielding more, investors have diversified into Canadian debt.

The country has a AAA rating and its bonds yield relatively more than other safe havens such as German bunds and Japanese government debt.

The increase was such that in May it produced a 10bn net surplus in portfolio flows.

This will more than cover the current account deficit if it continues and this should add a further impetus to the loonie.

But, Trumpxit Could Weigh on CAD

The increasingly close presidential race, which could see Donald Trump elected to the white house, is a factor which would weigh on the loonie, however, according to analysts at Credit Suisse.

Trump’s protectionist policies which are likely to see tariffs placed on foreign imports will hit the US’s two largest trading neighbours the hardest -  Mexico to the south and Canada to the north.

Credit Suisse see the potential for uncertainty surrounding Trumpxit as a major driver of Canadian dollar weakness in the short-to-medium term, especially if he continues making gains like the ones he has in opinion polls lately.

Sterling’s future Uncertain

Turning now to the pound, the main positives for the currency are the possibility that trade negotiations with the EU will yield a deal which will keep the UK in the single market.

Currently Theresa May is making early attempts to lay the foundations of an agreement with the EU which keeps the UK in the trade club but places an emergency brake on migration.

German chancellor Merkel appears to have leant a sympathetic ear to early soundings but it remains to be seen whether it progresses further.

If a such a deal became a realistic option then it would provide a huge underpinning of support for the pound.

The other main source of potential upside for sterling would come from signs the weaker pound was helping exports and rebalancing the economy.