Canadian Dollar Gains on Pound at Start of Week But Studies Suggest Strength Could be Temporary
Despite a soft start to the new week we believe the Pound to Canadian dollar exchange rate has reached a tipping point which could herald better rates going forward.
The Canadian Dollar is seen advancing at the start of the new week in line with the other commodity currencies.
We have noted the move higher is likely a result of improved house prices in China - rising house prices are a good indicator for stronger commodity prices, something CAD is particularly sensitive to.
The August CREIS (China Real Estate Index System) data highlights a re-acceleration of prices across all tiers.
While the data has given CAD a boost, we would not read too much into the event.
"Chinese house price growth has been a good lead indicator for the mining sector, but we don't believe the recent acceleration is the beginning of a new upward trend that will drive new starts back to new highs, rather a result of buyers stepping into the market ahead of tighter lending conditions," says Richard Knights at Liberum Capital.
The Pound has strengthened against most counterparts after a string of strong data releases, the most recent and significant of which, was a rise in Manufacturing PMI in August.
Against the Canadian Dollar, we see sterling has risen from the 1.66 lows back to the 1.74 resistance point where it is expected to pause.
This has resulted in the GBP/CAD chart recovering to the point where it is now showing a potential bottoming pattern in the shape of double-bottom (see chart below:
These patterns are made up of two consecutive troughs occurring at a similar level, and signal the potential for a reversal of a trend higher.
An upside target is activated when the pair breaks above the pattern’s ‘neckline’, roughly situated at the level of the intervening peak, which on GBP/CAD is situated at 1.7500.
Initially such a break would lead to a move higher to a target at 1.7640 where the R1 monthly pivot is situated, normally a strong resistance level.
A break above the pivot, signalled by a move over 1.7710, would probably the lead to a move up to the final target calculated from the pattern at 1.7900.
MACD has moved above its zero line signalling that the trend is now bullish.
Other analysts are more bearish, such as Scotiabank’s FX strategist Shaun Osborne, who sees the possibility of a correction back down to as low as the 1.71 area.
“GBPCAD failed to secure the close above trend resistance (consolidation break out) at in the upper 1.73 area yesterday and has weakened a little more materially on the intraday charts so far today.”
Osborne sees a break above 1.7390 as key in signalling more upside, and. “extend towards 1.7545/50, but that prospect looks more dubious on the basis of price action today.”
“The 6-hour chart shows the market forming a bearish “gravestone” doji right on trend resistance, which implies near-term downside risk—perhaps all the way back to the mid 1.71 area—which will have to hold to keep near-term rebound hopes alive.”
He concludes:
“A potentially promising rebound in GBPCAD may have stalled.”
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.
The main data release for the pair in the week ahead is the Bank of Canada (BOC) rate decision, although currently expectations are for the central bank to maintain rates at 0.50%.
Broker TD Securities are relatively positive about the outlook for monetary policy despite poor recent data from Canada as a rise in the US is likely to have a positive knock-on effect on Canada.
“We expect the statement to hold a constructive tone in confirming that the growth narrative remains on track, underpinned by US growth, fiscal stimulus and accommodative financial conditions. Yet we do see a risk that the Bank highlights greater concern over financial vulnerabilities due to the growing signs of a modest correction in the Vancouver real estate market.”
Services PMI Data Gives GBP a Strong Start to the Week
A strong start to the new week was gifted to Pound Sterling after Services PMI data from IHS Markit and the CIPS have confirmed the economy's largest sector expanded in the month of August, putting behind it the slump seen following the UK's vote to leave the European Union.
The data read at 52.9, well ahead of economist forecasts and market positioning that expected a reading of 50 to be delivered.
Business have reported that the uncertainty posed by the EU vote has started to abate with the forward-looking business expectations index recovering most of the ground lost in July:
Of note, it has also been reported that inflationary pressures are rising as a result of the weakened Pound.
Encouragingly, job creation has resumed in August having paused in July.
"Business optimism ricocheted back to pre-Brexit levels, reassured by market stability and clients bringing dormant projects back to life. Whether this steadiness continues will largely depend on the sector’s reaction to the UK Government’s approach to the Brexit negotiations as the sector keeps one eye on business as usual and one eye on possible obstacles ahead," says David Noble, Group Chief Executive Officer at the CIPS.
The other main release from the UK is Manufacturing Production – with analysts estimating a fall of -0.4% mom in Jul, from -0.3% in June.
The recent strong Manufacturing PMI suggests that the consensus estimates may be overly pessimistic
