Why the GBP/CAD Rate is Forecast to Rise in the Week Ahead
A bullish weekly chart and deteriorating Canadian economic fundamentals are supporting the outlook for the GBP to CAD exchange rate.
GBP/CAD has risen quite strongly in the past week after ream after ream of economic data release showed the effect of Brexit on the UK economy was less than had been feared.
The strong retail sales data was a particularly positive shot to the British Pound which has now enjoyed two weeks of advances against the Canadian currency.
Sterling rose to highs of 1.7155 versus the CAD, before retracing back to 1.7085 where it closed out the week.
The pair has been helped higher by poor Canadian fundamentals which most sectors of the economy now showing they are in decline except residential investment.
The wild fires in Alberta didn’t help none either, as they say.
The recovery in crude from the $40 dollar lows of ten days ago failed to help CAD as much as had been forecast, as the strong correlation is closest in the USD/CAD pair.
“The Canadian economy appears to have contracted sharply in Q2 after a strong start to the year. Our forecasts reflect weak underlying fundamentals in addition to the impact of the Alberta wildfires in May," say TD Securities in a note to clients.
Business investment (-8.4%), export activity (-5.4%) and soft retail activity (+0.5%) are expected to weigh heavily on the GDP while residential investment (+6.5%) provides a pocket of strength.
However, the blip in Canadian economic performance may prove temporary.
"Looking forward, strong industry-level growth for June (+0.4% m/m) should provide a solid hand-off to Q3,” say TD.
Latest Pound / Canadian Dollar Exchange Rates
  | Live: 1.8599▼ -0.01%12 Month Best:1.8915 |
*Your Bank's Retail Rate
| 1.7966 - 1.8041 |
**Independent Specialist | 1.8338 - 1.8413 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
That being said the outlook is supported by several other factors such as the fiscal stimulus being put into the economy by the new Canadian government, the longer term bullish expectations for crude and the fact the US – Canada’s largest trading partner is ahead of the curve are all positives.
As we have noted before on PSL, the loonie is also supported by net foreign portfolio inflows, due to the sudden popularity of its relatively high yielding bonds versus G10 counterparts and safe-havens such as Japanese bonds which pay negative returns.
The fact the pound will be subject to probably less flattering PMI data in the week ahead, may also be a cause for concern for any sterling bulls trading against the Canadian dollar (loonie).
July PMI’s were one of the notable exceptions to the general run of positive data releases for the period after Brexit, with all three falling below 50, the difference between expansion and contraction. It now remains to be seen if the bad run lasts into August as many expect. If it does that will put new pressure on sterling and push GPB/CAD down.
From a technical standpoint, the pair is in a bullish short-term up-trend, which has just corrected back and the started moving higher anew.
We see the pair probably continuing higher to the next target at the monthly pivot situated at 1.7128, which is a considerable obstacle to further upside.
A further move above the 1.7155 highs would provide confirmation of an extension higher to 1.72, and beyond.
Scotiabank’s chief FX strategist, Shaun Osborne, is also quite bullish, although he bases his view on the weekly chart, which he argues is showing a bullish Japanese candlestick pattern called a Morning Star reversal.
“GBPCAD is quiet, consolidating around 1.7050, the level roughly coinciding with the 40-day MA and the August 4 close. The balance of risk appears to be shifting to neutral following the rally off the mid-August lows," says Osborne.
However the weekly candles remain bullish argues Osborne and he believes the pair may be completing a bullish morning star reversal.
"The extended lower candles of the two most recent monthly candles also hint to considerable support under 1.70,” says Osborne.
