Further Declines in Canadian Dollar are Forecast

Our studies suggest more upside is to be had for the GBP/CAD exchange rate but the outcome of this week's Canadian inflation data release will be pivotal.

The Pound to Canadian Dollar exchange rate has settled just above the 1.72 region with volatility falling sharply this week.

The fall in volatility that has befallen foreign exchange markets comes in anticipation of the mid-week meetings of the Bank of Japan and US Federal Reserve which should spark further moves in GBP/CAD.  

In the week ending 16th September the Pound and Canadian Dollar were the two worst-performing currencies in the G10 complex.

However, when pitted against each other Sterling came out on top.

Whether the Canadian Dollar's recent negative run extends could largely rest with the outcome of Canada's inflation data for August, released on September 23rd.

The Bank of Canada (BoC) has started to voice concerns about falling inflation and so poor figures this week could prompt the BoC to cut interest rates.

Such a move would likely heap pressure on the Canadian Dollar as lower interest rates tend to see a reduction of inbound investor flows which tend to keep currencies elevated.

"We remain bearish on CAD, with the latest change in the BoC's stance adding support to our view," say Morgan Stanley in a briefing to clients.

Morgan Stanley see an increased chance of the BoC cutting rates again this year and, "given the markets are only pricing in 4bps of rate cuts for this year, and CAD has the largest long positioning in G10, we think further data weakness could weaken CAD significantly."

Canada’s relatively high yielding bonds have attracted interest recently from international investors seeking yield in a world where many of the traditional bond markets are showing negative yield growth.

In May inflows peaked at a 10bn net -  a figure which if sustained would reduce the current account deficit to a surplus, supporting CAD in the process.

However, a poor inflation print on Friday would hit Canadian yields making the less attractive to foreign investors and reducing inflows.

Such a move would assist the GBP/CAD exchange rate's rise and establish an up-trend, at least in the short-term.

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.

 

Charts Advocate for Further Gains

Peak and trough progression is now up, suggesting a continuation higher for the pair.

“GBPCAD has racked up four consecutive weekly gains and may be heading for a fifth this week, steadying the mid-year plunge in the cross," says Scotiabank’s FX Strategist Shaun Osborne.

He adds:

"Short-term trend strength signals are positive and the GBP has done some good work in extending gains through key trend/pullback resistance at 1.7320 (now support). But the market remains below 1.7550 - a level we think the GBP will have to trade though (clearly and in a sustained fashion) to signal that the trend may be shifting more decisively.”

The tough double layer of resistance in the 1.75s could prove difficult to overcome and like Osborne, we would ideally want to see a clear break above before taking a more bullish view.

The R1 monthly pivot at 1.7641 is another major impediment to progress higher so whilst we concur with Osborne’s view that a break above 1.7550 would confirm more upside we see it limited initially to 1.7640.

We would then want to see a break above 1.77 for confirmation of more upside to a target at 1.8000.

The MACD indicator in the lower pane is still constructive for more upside as it is above zero.

The Pound: What to Watch

The pound has a relatively quiet week ahead, although Septembers CBI Industrial Trends New Orders data on Thursday will be closely followed since it is the first data print for September.

The close focus on UK data in the wake of the referendum will continue, especially now November has been earmarked for rate cut from the Bank of England (BoE).

Much will depend on the data between now and then as to how big the stimulus push will be at the November meeting, if at all.

At Thursday’s BoE meeting there was no increase in monetary easing due to the unexpectedly strong data released since Brexit.

Nevertheless, it appears that the BoE put that partly down to their own prompt action, so are probably inclined to feel a stimulus top-up may be required in November.