There is a growing consensus amongst analysts as we move through the middle of the week that the Pound to Canadian Dollar exchange rate has peaked and could extend lower.
Said in a different way the Canadian Dollar may have bottomed.
In his analysis of USD/CAD – but also relevant to CAD in general – BNN’s Larry Berrman marshals arguments to support the notion the Canadian Dollar has bottomed.
His main argument is that the outlook for oil has improved and since oil is Canada’s greatest export, so has the outlook for the Canadian Dollar.
“Over the weekend, it appears that Russia and Saudi Arabia had a meeting of the minds and want oil prices higher. They will agree to keep production levels at current output through the first quarter of 2018,” says the analyst
He then adds:
“Going into the inventory draw period typically seen in the summer months, the near-term bottom for crude is probably in. Energy is the biggest overweight sector we have right now.”
>> Update: Best international payment rate on GBP vs CAD now seen at 1.7484 with bank seen offering in region of 1.7024-1.7149. More on details here.
Another argument for CAD rising is that positioning in the futures market has reached an excessively oversold level, from which the risk is for a bounce.
“As you can see, as of last week, the large speculators are the most net-short the Canadian dollar as they were when it was 67 cents (US$1.47) as WTI hit the US$26 level in January 2016, said BNN’s Berrman.
Canadian investment bank TD Securities also see the possibility of CAD strength on the horizon.
They argue the Dollar is set to weaken versus CAD due to its worsening economic data releases, however, they also see weakness for ‘European’ currencies too.
“Our short-term valuation models show the European currencies the most at risk to negative news flows so we still prefer fading EUR and GBP near the recent highs.”
From a technical perspective, we take note of Scotiabank’s Shaun Osborne who notes how GBP/CAD is forming a ‘rounding top’ pattern, which is a rare topping formation.
“The “rounded” nature of the late Apr/early May peak still suggests a significant change in mood on the cross, we feel; the formation implies that investors are slowly but surely liquidating the recent build-up of long positions in the GBP,” said Osborne.
Whilst he is not rampantly bearish, he nevertheless sees weakness extending to the low 1.70s.
“There is no major “smoking gun” signal pointing to a reversal but the accumulation of technical signals still strongly favours weakness extending towards 1.72/1.73 or so near-term,” said the Scotia analyst.