GBP/CAD: Short-Term Trend is Up
Pound Sterling makes a tentative recovery against CAD on hopes of a soft Brexit option and bad news on EU-Canadian trade deal.
The Canadian Dollar continues to look fragile with the impact of last week's Bank of Canada statement still making its presence felt.
The BoC left borrowing rates unchanged but acknowledged that it almost cut them to jolt parts of the economy, like trade, that have been slow to bounce back.
Canadian bond yields have fallen as a result of expectations for further cuts, in turn taking the CAD down alongside.
CAD remains close to seven-month lows against its broadly stronger US Dollar as a consequence.
This has allowed the under-pressure some space within which to reover; GBP/CAD has recovered towards 1.63 having hit a bottom at 1.5610 on the day of Sterling’s flash crash.
The very short-term trend is now up, after forming two peaks and troughs higher, which are visible on the 4hr chart below:
The extremely long bar which formed on the day of the flash crash lows is normally a fairly reliable signal of exhaustion and is a further sign the pair is likely to rally.
This very young uptrend post-flash crash is likely to extend higher, and the MACD momentum indicator in the lower panel is now above the zero-line also backing up the possibility of further upside for the pair.
A break above the 1.6286 highs should probably lead to a move higher up to 1.6400.
Still bearish, however, is Scotiabank’s FX Strategist Shaun Osborne:
“The broader bear trend remains deeply entrenched on the short, medium and longer-term charts - which implies more downside risk and only limited scope for a rebound.”
Osborne dismisses the rebound, saying he still does not see a “durable bottom in place,” and as long as the pair remains below 1.66 he is bearish overall.
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.
The recovery towards 1.63 has been driven by a combination of a moderation in the language used by the Government to the approach they will be taking to negotiations with the EU: from a hard -Brexit approach to a softer-Brexit.
Healdines surrounding Brexit will remain the number one driver of GBP this week we believe.
Meanwhile, a sea-change in the outlook for Canadian monetary policy has undermined the Canadian Dollar (loonie), after the Bank of Canada (BOC) raised the possibility of introducing stimulus for the first time in months.
The eleventh-hour failure of the EU and Canada to agree to a trade deal has also kept a cap on any upside for CAD.
“The EU Leaders summit in Brussels is currently witnessing dissent on the EU-Canada deal from a Belgian region. While a compromise will likely be eventually reached the late stage hitch could be used as further justification to maintain USD/CAD topside targets,” commented CIBC Capital Market’s Jeremy Stretch on the subject.
Data for the GBP/CAD pair
In a light week for the pair, the main release for the Canadian dollar is Wholesale Sales in August, due out on Monday with analysts forecasting a reading of 0.5%.
With markets appearing particularly responsive to under-par Canadian data releases in light of the BoC's desire to cut interest rates any miss on expectation could hurt CAD.
As for the Pound, the most significant release in the week ahead is Thursday's Q3 GDP, which is forecast to come out at 0.3% qoq in the third quarter, and to show a 2.1% rise year-on -year.
Despite Brexit uncertainty, UK data remains robust with last week's retail sales data being particularly encouraging for the services-lead economy.
We believe however that data will play second-fiddle to news headlines concerning Brexit and which way the government is swinging on the bard-versus-soft Brexit scale.
