Pound to Canadian Dollar Rate Upside Forecast on Double-Bottom Formation, Loonie Starts to Look Stretched

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The British pound may have finally turned a corner agianst the Canadian dollar with our forecasts suggesting further relief over coming days

The pound to Canadian dollar is showing mild reversal signs which could herald the beginning of a new up-trend for the pair.

GBP/CAD has started to form the outline of a double-bottom reversal pattern on the four-hour chart.

These patterns are made up of two troughs interspersed by a peak. The trough lows stop at about the same level.

Simply put, the pattern looks very much like the letter ‘W’ - it does have a decent track record of predicting upcoming moves.

Double-bottoms occur at the end of down-trends, where they signal a reversal from down to up.

The general requirement is that volume and momentum should be higher on the second low, which happens to be the case with this particular pattern.

Confirmation the trend has turned comes from prices moving above the top of the intervening peak of the ‘W’, or the “neckline” as some analysts call it. This tends to lead to a move higher which is between 61.8% of the height of the pattern and 100%.

For bullish confitrmation the pattern had triggered an upside breakout we would be looking for a move above 1.8410 (the April 18 highs) leading for an initial  target at 1.8600 and the 200-4hr moving average.

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Swissquote Research Constructive on CAD

Crude oil was able to shake off the disappointment from Doha to rally a respectable 15% from the week's lows.

In broader terms the expected deterioration in risk sentiment on soft economic data, further supply-driven downside in oil prices and higher US real yields were expected to weigh on commodity currencies.

"However, as we anticipated global central banks accommodating policy has been able to support risk appetite. Demand for EM and commodity linked assets continue, partially added by further mass liquidation of European bonds with negative yields," says Peter Rosenstreich at Swissquote Bank.

Heading into an FOMC week Swissquote are forecasting a short-term bullish reversal targeting specifically USDCAD.

On the domestic front, the effects of slowing growth and lower commodity prices will be highlighted in the data today.

Canadian February retail sales rose a fragile 0.4% from a revised lower 2.0% m/m, reversing January unexpected strength.

Key inflation measures, core and headline CPI, indicated further easing away from the BoC 2% inflation target.

"While the critical determinates of CAD pricing remains macro-driven, having an underlying dovish BoC and increasing expectations for additional easing, will pressure the Lonnie," says Rosenstreich.

The analyst suggests the current rally in crude prices feels stretched as the fundamental rational for additional price increase are thin and clear market oversupply remains dominate.

Improvement in China trade data, including rise in crude oil imports, are too fresh to jump into longer term conclusions over the sustainably of any enhancement in crude demand.

Over-optimism in the China recovery story and risk sentiment is likely to be challenged ahead of the Fed meeting, resulting in a pullback in crude prices.

Speculative market data shows FX traders are now net long CAD, so as crude prices decline, speculators will quickly cut and thus prompt a sharp decline in the currency.

"We are constructive on USDCAD in the near-term watching for moves towards 1.2750 to reload in long in order to target 1.300 range resistance," says Rosenstreich.

FX Themes to Watch this Week

The pound appears to be strengthening considerably against most of its counterparts as Brexit risks ease following polls showing a widening lead for the pro-EU campaign.

If the lead widens then the pound could strengthen even more rapidly.

It has been estimated, by researchers at Italian bank UniCredit, that most GBP pairs have lost between 8-10% in value due to a combination of hedging and Brexit fears.

A fair amount of this referendum ‘premium’ could be rapidly unwound if polls started to show an unbeatable lead for Bremain - or possibly even a 60% vote for staying.

The Canadian dollar (loonie) has strengthened as a result of the recovery in oil, which is Canada’s primary export.

The loonie has gained further impetus from the pro-growth fiscal agenda adopted by its new government.

Recent inflation and Retail Sales was broadly positive and point to a forecast of a 3.4% annualized rise in GDP in 2016, which is relatively high for the G10, according to research from the Royal Bank of Canada.

Retail Sales rose by a higher than expected 1.0% in February (mom), whilst year-on-year it rose by a strong 1.5% after January’s 2.0%.

Inflation rose by 0.6% mom in March, with Core up by 0.7%, whilst annually they rose by 1.3% and 2.1% respectively.

According to Royal Bank of Canada’s Paul Ferley and Dawn Desjardins, the takeaway from the data is that overall it meant the Bank of Canada was much less likely to reduce interest rates any further - a course of action which would weaken the loonie, thus the currency rose as a result of this prospect lessening in likelihood.

UK Data to Watch

The main focus for the pound this week will be the release of first quarter GDP data on Wednesday April 27.

The pound may experience some choppiness if the data shows a dramatic fall in growth, which is possible given the contraction experienced in certain secotrs of the economy as a result of Brexit fears.

On Monday data from the Confederation of British Industry (CBI) will show the level of orders of new businesses.

Canadian Data: Domestic Events in the Week Ahead

Dominating the week ahead in Canada will be speech by Bank of Canada Governor Poloz entitled: "A New Balance Point: Global Trade, Productivity and Economic Growth", in which he is expected to reiterate the important of exports for the Canadian economy.

Will the Governor touch on the recent strength of the Canadian dollar?

We know the BoC is growing increasingly uncomfortable with CAD's strength of late with the April policy announcement seeing poicy-makers nudge against the appreciating currency.

While we doubt Poloz will take too-an-agressive stance on the value of the currency we would imagine it will come under scrutiny. There is a risk that he fires a strong warning to currency markets that there is a threshold beyond which they would not like to see CAD advance.

That said, there is also the chance the BoC will avoid the topic altogether having noted that over the past 2 weeks CAD's appreciation has settled.

Either way, what we have is an important event in the evolution of this story.