Forecasting the Pound to Canadian Dollar Exchange Rate Recovery to Extend, Support Seen at 1.8542

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The GBP to CAD exchange rate is looking poised to extend further advances having crossed a medium-term barrier this week but be aware that Canadian employment data will be watched ahead of the weekend. 

  1. GBP-CAD rate at 1.8661 at time of writing
  2. 50 day moving average should now act as support and protect against weakness
  3. Beware Canadian dollar strength if employment data beats expectations

The Canadian dollar is in focus on Friday with the release of employment data forming the highlight of the week's data calendar. 

Analysts are bearish, forecasting a mere 1K jobs to have been created in the previous month and the Canadian dollar will trade according to how this number is hit or missed.

Regardless of the outcome though the British pound appears to have gained the upper hand against the Canadian dollar now that the exchange rate has broken above the 50 day moving average.

This is notable as sterling has been unable to achieve this technical feat since December 2015.

This could well encourage further advances as traders will take the break as a signal that the layers of sell orders peppered around the 50 day MA have been cleared out.

With this barrier removed the GBP/CAD should find upside traction easier to come by while weakness should be contained at the 50 day moving average which now becomes support. The level is presently situated at 1.8542.

GBP to CAD upside traction

“The trend lower has clearly moderated in the past couple of weeks and, with the longer-term charts denoting strong, long-term support for the GBP in the 1.80/1.81 range, the risk of an extension below the 1.80 area may be moderating,” says Scotiabank’s FX analyst, Shaun Osborne.

Osborne would ideally want to see a break above the key 1.8500 level for confirmation of an extension higher though.

It would require a strong weekly close to generate a bullish reversal signal:

“Evidence of a bullish reversal in the downtrend remains absent at this point but a strong close to the week— at or near current levels—should add to upward pressure on the GBP.”He said in his note on the pair.

Whilst a break above 1.8500 - or the new 1.8519 highs (1.85 was breached this morning) would probably see a rise in the short-term, the really formidable level for the pair is 1.8600, as it is at the level that the pair would meet the 50-day moving average, as well as the major trend-line for the whole move down since the start of the January 2016 peak.

A break above the 1.8600 level, therefore, would be a critical bullish reversal sign for GBP/CAD.

Outlook for CAD from the perspective of Oil Prices

The loonie is highly correlated with oil, so a fall in the commodity tends to be lead to a corresponding fall in the currency.

Recent data from the Organisation for Petroleum Exporting Countries (OPEC) showed increased supply in two of the world’s largest oil producers Iraq and Saudi Arabia, which had the effect of weakening the price of crude. An expected 17% rise in North Sea Oil also contributed to the glut-fuelled decline in the commodity.

As a result of this the pound gained against the Canadian Dollar, rising from 1.8344 to highs of 1.8519.

The fall in the loonie may only be temporary, however, according to commodity analysts at Barclays Capital, who are overall bullish oil.

They see a combination of increased ‘outages’ (meaning cuts to production due to oil rigs being decommissioned or oil companies going out of business) and lower production in non-OPEC countries like Nigeria, Mexico, Brazil and Russia, as leading over time to a stabilization in market supply, which will be supportive of price.

The fall in capital investment suffered by the oil industry due to the slump in the oil price has meant a huge reduction in the number of new projects coming on line, a cancellation of many ongoing projects, and the closure of many unproductive rigs, which over time will start to hit oil production.

Barclays note 50 dollars a barrel may provide a ceiling, however, as above that level it becomes profitable to resurrect US shale oil operations, many of which were shut down when prices fell to lows of 27 dollars a barrel earlier this year.

Other analysts have noted, however, how US shale oil operations are extremely capital intensive and therefore rely on extremely low interest rates to be commercially viable, and since the US appears to be poised to enter a higher interest rate cycle, many investors may be put-off reinvesting in operations.