Pound to Canadian Dollar: Weakness Forecast in the Week Ahead

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The GBP to CAD exchange rate remains in a long-term down-trend, and despite reversal signs on the shorter-term charts, I remain bearish.

The main area to focus on is the trend-line and 50-day moving average which are sat close together at about the 1.8575 level - only a break above that level would signify a bullish move higher.

As a result of the dominance of the longer-term down-trend expectations are for a continuation of that trend lower, with a break below the current 1.8139 lows indicating the likelihood of a continuation down to 1.8000.

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Patterns on the lower timeframe, including a double bottom reversal pattern, could signify short-term gains up to the 50-day and the trend-line at 1.8575, with confirmation coming from a move above the 1.8509 highs.

FX Themes

The Canadian Dollar (loonie) has shown resilience of late, particularly against the pound.

This is mainly due to the rise in the price of oil which heavily influences the Canadian Dollar as it is a major exporter of the commodity.

Oil has now established itself above the 40 mark, and a growing consensus now think it has the potential to reach 50 dollars a barrel.

A supportive fiscal landscape is a further support to the currency, and results from the government which is embracing a pro-growth agenda has also helped keep the Canadian Dollar well bid, as it has taken the pressure off the central bank, which might ordinarily have to spearhead stimulus using monetary policy.

One risk is that inflation will continue falling and if that happens it may raise the possibility of the Bank of Canada (BOC) having to re-enter the fray, by cutting interest rates. Lower interest rates always impact negatively on currencies and this would severely hit the Canadian dollar.

Brexit is the main theme for the pound, with the current focus on polls and whether they are showing a continuing widening lead for the Remain camp. The increasing lead up to now has caused a recovery rally in the pound.

It has been found that the large number of undecideds (15%+) would probably vote to Remain if forced to come down on one said or another. How the large undecided eventually vote is expected to swing the Referendum one way or another.

A report from the treasury about the consequences of a Brexit was highly negative seeing considerable risks to the economy. This, and President Obama’s admission that a replacement free-trade agreement with the US would not provide a quick fix, may have supported the stay campaign.

According to a research note from Unicredit’s Chief Global Economist Erik Nielsen, even without consideration for vacillating voters Remain’s lead has now extended to double digits and betting shops are placing odds of staying in the EU at over 70% (Ladbrokes currently offer 73% and Betfair 75%) - from under 64% previously. They are normally very accurate.

Some analysts are arguing that the April rally will not extend as there will always be some risk of Brexit until after the results have been published and so Sterling will always carry some weakness from that risk.

The recovery from the March lows at 1.38 presents about a 5.0% gain. According to UniCredit Brexit fears accounted for an 8% fall in price to 1.40. That translates into roughly 9-10% to 1.38. Overall, then, we can assume then that about a half of the Brexit fear premium has been recouped in the April rally.

This is admittedly a fairly substantial amount, and the lessening fear of a Brexit may be running out of impetus, after all there is always a risk of a success for leave right up until the last vote is cast.

Another factor in the pound’s rise, however, is increasing rate hike expectations:

“Interestingly, 12-month BOE rate hike expectations have firmed and the British Pound has traded higher even as UK economic data outcomes has deteriorated relative to consensus forecasts in recent weeks,” says Ilya Spivak, Currency Strategist at DailyFX.

According to a recent note from Capital Economics, however, the assumption that Remaining in the EU will increase the probability of a rate hike are false, as if anything the rise in the value of sterling following a referendum win for the stay camp would place downwards pressure on inflation, by making foreign imports cheaper.

Data hotspots in the week ahead

The highlight of the week for the Canadian Dollar is expected to be the release of the Labour Force Survey in April. Current expectations are for Employment Change to show a fall of -1.5k from, the previous month’s 40.6k rise.

National Bank of Canada think there is a risk April may show a contraction in labour market gains after the stellar labour market performance in Q1.

“76K private sector jobs were created in Q1, the best quarterly performance since 2013 ─ a moderation is in the cards for the second quarter of the year. That could be visible as early as April with a net loss of roughly 10K jobs.”

They also think the Unemployment Rate could rise one tick to 7.2%.

Other data includes the Ivey PMI - a general gauge of business activity - which came out at 50.1 in March.

For the pound the focus will be on PMI’s with Manufacturing, Construction and Services in April all released in the week ahead.