Canadian Dollar Forecast: More Weakness Against Pound, US Dollar Likely
CAD trades soft ahead of the weekend with the currency absolutely failing to benefit from a surge in oil prices - our studies suggest further weakness is possible against the Pound and Dollar.
- Pound to Canadian Dollar exchange rate:1.7216
- US Dollar to Canadian Dollar exchange rate: 1.2944
The Canadian Dollar is looking limp ahead of the weekend with the currency failing to benefit from a surge in global oil and gas prices.
We have long observed that moves in CAD have tracked moves in oil prices owing to the importance of oil in the country's export basket.
Recently though we wrote analysts were reporting the relationship was starting to break down:
This breakdown has all but been confirmed after the currency failed to rally on news of WTI oil's surge above the $46.50 resistance level.
Traders piled into oil after the EIA reported a 12 million barrel drawdown in US stockpiles - an eye-catching figure that suggests demand for oil remains robust.
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.
Forecasting Further GBP/CAD Strength
GBP has been in recovery-mode against its Canadian counterpart since mid-August - around about the time when markets realised the UK currency was looking far too cheap in light of the tenor of the data coming out of the economy.
Since the Brexit vote we have seen initial shock give way to a business-as-usual attitude; something that has prompted a sharp rebound in the various PMI surveys.
Foreign exchange markets reversed and with so many people betting against Sterling it was quite easy for the currency to rally on short-covering alone.
GBP/CAD rose up to a double resistance line made up of the early August highs and a possible neckline for a double bottom (light blue line) shown on the chart below:
These two levels have essentially acted as a ceiling repulsing further upside and the pair has started falling again forming a highly reliable bearish Japanese candlestick called a ‘Three Inside Down’ on the daily chart:
The technical outlook is more balanced and neutral now, as downside is also limited by the 50-day moving average not far below the current level, which is likely to provide a floor under which it will difficult to break.
Our call is still mildly bullish, with a break above the neckline, signalled by a move above the 1.7600 level signalling clearance of the neckline has been successful and the pair is likely to rise up to a target at 1.8050.
The target is generated by extrapolating 61.8% of the height of the pattern from the neckline higher.
Scotiabank’s Shaun Osborne notes the rejection from key resistance last week, which he says left the pair vulnerable to more downside:
“GBPCAD’s stall against key trend resistance last week—and the subsequent drop under short-term trend support—leaves the cross looking vulnerable to the downside again.
“Just as the market was getting more constructive on the GBP outlook, it appears the bull move may be running out of momentum.”
Osborne earmarks 1.7500 as a key watershed level, above which he would once again be more constructive on the pound, as well as such a move changing the tone of the whole chart to a more bullish one:
“We note that broader GBP stability would likely be contingent on a sustained recovery through the mid 1.75 zone. That remains a distant prospect at this point.”
Outlook for USD/CAD: Trapped in a Range
The US to Canadian dollar pair is still stuck in a range, which has been infolding for some time.
“More broadly, however, the wide, sideways range that has controlled price action since the middle of the year remains intact and there is no obvious pick up (yet) in the trend oscillators. This suggests that the market is essentially range bound,” says Osborne.
Adding that a clear move below 1.2800 would be required to trigger more downside, 'forcing a rethink' of near term risks for the pair:
“A clear move under 1.28 and new cycle lows (below 1.2765) would force a rethink on near-to-medium term risks for the USD from our point of view.”
It has to be said that on the weekly chart this sideways market move looks more like a bear flag that simply a sideways move, and as such has very bearish connotations.
A break below the 1.2759 lows would signal a probable breakout from the flag and this it was on its way lower.
Such a move would be expected to reach the key 1.2500 lows.
A further break below 1.2450 would probably signal the extension of the flag’s pole even lower, to a target at approx. 1.1800, based on the extrapolation of 61.8% of the initial down-move prior to the formation of the flag , which was from 1.45 to 1.25.
Bank of Canada Triggers Bout of CAD Weakness
At their September 7th meeting the Bank of Canada warned that the inflation outlook had turned weaker, driven by "larger and more broad-based" weakness in exports.
The Bank also lowered the profile for growth relative to the July meeting.
"The shift in language is bearish for CAD, hinting to another extension of the anticipated closing of the output gap—currently seen closing ‘towards the end of 2017," says Shaun Osborne at Scotiabank.
Yield spreads have responded to the shift in the outlook for relative central bank policy with a renewed widening in the U.S.-Canada 2Y spread.
OIS markets are also reflecting a slight increase in the risk of further easing over the next 12 months.
