The GBP to CAD conversion has recovered lost value as markets react to the latest OPEC deal on global oil production.
The Pound to Canadian Dollar exchange rate is trading at 1.6762 at the time of writing - off the day's floor at 1.6614 as the Canadian Dollar fails to catch a bid off the huge rally in oil prices.
Crude oil has rocketed by over 8% and we would typically expect a robust response by the Canadian Dollar which tends to track oil movements.
Instead, GBP/CAD is teetering on a day-on-day loss as is USD/CAD.
What is therefore arguably of more importance for the Canadian Dollar then is the massive rally in the US Dollar which is being tracked by the Pound, as we note here.
Rising bond yields in the UK and US appear to be the culprit.
Therefore it looks like the Canadian currency is being neutralised.
Nevertheless, the CAD is strong elsewhere and could yet strengthen broadly moving forward owing to the oil price jump.
OPEC Deal Pushes Oil Prices and the Canadian Dollar Higher
Oil ministers from the cartel known as the Organization of Petroleum Exporting Countries (OPEC) have concluded their meeting in Vienna where it was agreed that a cap on oil supply would be enforced for the first time since 2008 in a bid to help boost prices.
OPEC has agreed to cut oil production by 1.2 million barrels a day to 32.5 million barrels.
The cut will come into effect in January thanks to unanimous backing by all members.
Non-OPEC member Russia has agreed to a 300K per-day cut to production.
OPEC's biggest producer, Saudi Arabia, has agreed to bear the brunt of the cuts by paring production by 486K barrels a day.
The price of Brent crude has climbed to around USD50/bl on the deal, which in the big picture is a quite muted response.
The reaction has been greater at the front end of the Brent crude forward curve, thus leading to a narrowing of the contango by about 2% on a 1Y horizon
"This reaction may reflect either a lack of confidence in the longevity of this deal or an expectation that it will lead to higher output from, e.g. US shale producers, partly offsetting the effect of the output cut. Nevertheless, we look for oil prices to head higher in 2017," says Jens Nærvig Pedersen, Senior Analyst at Danske Research.
This is based on Danske Research's expectation of higher global economic growth and inflation, in particular in the US economy, the world’s leading oil consumer, which should support growth in oil demand.
In one year’s time, Danske also look for the USD to trade at a lower level than today, which supports a higher oil price. We expect the price of Brent crude to rise to USD58/bl in Q4 17.
This Matters for the Canadian Dollar which Could Turn Against the Pound
Oil has lost over 50% of its value recently and the cut in revenue is undermining the economies of many of the major exporters in OPEC.
The Canadian Dollar is highly correlated to oil as it is Canada’s largest export.
An oil supply cut agreement will provide a catalyst for a recovery in the currency.
A move higher in the Loonie would translate into a move down for GBP/CAD, which has already shown weakness recently after breaking below a key chart level.
The break lower never met its target and was prematurely cut short by the release of upbeat UK lending data on Tuesday, which led an unexpected rebound in the pair.
The downside targets from the trendline break at 1.6400 and then 1.6300 are still active and will probably be met eventually.
An OPEC meeting supply cap could be the driver to push the pair down to those targets.
Pound / Canadian Dollar Rate Under Pressure
The move higher in Crude is leading to a concomitant fall in GBP/CAD, which has already lost 0.8% on the day.
Unfortunately the falls won't be benefiting the strategy team at RBC Capital Markets who we reported at the start of the week were looking to profit on a GBP/CAD decline through the OPEC meeting.
However, it is on technicalities they have been shut out of the trade as their stop-loss was set quite tight to the entry.
Further downside caused by an OPEC deal would coincidentally fall in line with what technical analysts are saying.
Scotiabank’s Shaun Osborne, for example, has advocated selling GBP/CAD rallies saying he views the GBP sell-off as incomplete at this point.
“The market has not been able to make a new cycle high, even via the rebound from the “flash crash” low, and the broader trend remains clearly bearish (via successively lower highs and lower lows). We prefer to sell GBPCAD rallies,” says Osborne in a note.
We are also bearish, expecting the pair to eventually breakdown to 1.64 or 1.63, which are the targets calculated from the break below the up trendline.
These targets correspond to the move prior to the break (a-b) extrapolated lower after the break.
We, therefore, see a break below the 1.6585 lows as confirming a move down to 1.64, followed perhaps by 1.63.