The GBP to CAD exchange rate has broken above the 50-day moving average - a key bullish sign. Now traders await more follow-through to establish confirmation of the validity of the up-trend.
Since hitting lows against a basket of currencies in mid-January, the Canadian dollar has steadily climbed through to the end of April.
This sharp reversal of the currency’s earlier depreciation reflected a number of factors.
The price of oil recovered from less than US$30/barrel to around US$45/barrel currently on declining US rig counts, production issues overseas, prospects of a cap by some producers, and improving growth sentiment.
At the same time, indications of economic strength at the start of 2016 and rising expectations that the Bank of Canada’s next rate move is more likely to be a hike rather than a cut have pushed government bond yields higher.
However, “going forward, slower gains in oil prices and firming expectations that the Fed will raise rates again this year will likely result in a modest pullback in the Canadian dollar’s recent ascent,” note RBC Capital in a forecast note regarding the CAD.
Outlook for the Pound to Canadian Dollar
GBP/CAD has now broken clearly above the 50-day moving average, solidifying its nascent up-trend following the earlier trend-break.
Several up-side targets have now been met and the pair appears to be pausing and trading sideways whilst in review.
This is an equilibrium moment where a move substantially higher would confirm a more robust reversal; whilst a breakdown would signal a resumption of the hitherto dominant down-trend.
Sean Osborne, FX Strategist at Scotiabank, covers the pair in his daily technical brief, and seems to have a concluded a marginally bullish bias:
“The absence of stronger reversal signals in daily or weekly prices signals remains a concern from our perspective but the steady accumulation of the GBP on weakness— reflected in “rounded” nature of the low that has developed through April—suggests the basing needs to be respected.”
One obstacle to more movement higher is the R1 monthly pivot situated not much above the current level at 1.8691.
These are typically the focus of counter-trend forces as traders seek to capitalise on the pause/rebound which almost always occurs when prices touch pivots.
A clear break above, signalled by a move above the 1.8750, would probably indicate a decisive breakthrough, opening the way, then to further upside for the pair.
The value of the Canadian dollar is tethered to the price of crude oil such that a movement in the latter is mirrored by the former, at least most of the time.
Oil continues to push higher, and is now up well above expectations in the mid 40 dollars per barrel area.
Many analysts see 50 dollars per barrel as a critical ceiling as at that point US Shale Oil production becomes profitable again, leading to the probable reopening of many Shale oil wells which were abandoned when prices plummeted in 2015. This would increase global supply again, leading to another supply glut which is likely to counter-act any further rises in the price of oil higher.
There is an alternative view, however, that US Shale production will never return to pre-oil price collapse levels because the risks are too high crude will fall below 50 again, and because it is so capital intensive that it is only feasible in a low interest rate environment, which is not likely to last.
Canadian domestic economic data, meanwhile, has been disappointing, leading to concerns the Bank of Canada (BOC) may need to intervene again despite expectations it would not as the government’s fiscal spending programme would take up the strain of most of the stimulus required to boost the economy.
The widest trade deficit in history was recorded in March, and governor Poloz’s comments about the Canadian Dollar being overvalued in the press conference after the last BOC meeting, are signs the BOC could still intervene by cutting interest rates, which would be negative for the Canadian Dollar.
The pound remains in the throws of pre-referendum uncertainty.
Polls have actually shifted back to a closer race between the Remain and Leave camps after Remain started to pull-away materially last week, although Remain still lead by 3.0%:
“We note that betting market odds for the UK to leave the EU have picked up from around 28% to 33% over the past week. With the FT’s composite poll tracker putting the remain lead at just 3 points, we would not be surprised to see betting odds drift towards opinion polls in the run-up to the referendum.” Comments ING’s Viraj Patel.
Soft PMI data, showing Manufacturing fall into contraction mode at 49.2 was another notable drag on the pound. Construction and Services both remained above 50, which denotes growth, but came out below expectations.
After hitting highs in the 1.4770s the GBP/USD pair fell back precipitously, no doubt skinning-alive many an over exuberant bull in the process. The blood-bath didn’t end until the exchange rate eventually stabilized at about 1.4500.
It seems rate hike expectations are currently back in the frame, which markets - whether correctly or incorrectly – judging the possibility of s 2016 interest hike as more plausible following a referendum win for Remain, rather than Leave. One notable detractor of this point of view is Capital Economics who expect Brexit to actually lead to a higher chance of a rate hike than a win for the Stay party.
Data Out in the Week Ahead
The most important overall release will be the minutes of the Bank of England (BOE) rate meeting on Thursday May 12. The spotlight will be on a) whether the voting has shifted and b) whether international factors remain a concern.
UK Manufacturing Production is out on Wednesday and is forecast to show a rise of 0.3% in March, from -1.1% in the previous month.
Given the low Manufacturing PMI of 49.2 registered in April, analysts will not be expecting a very high result, however, if it is in oine with expectations, it may moderate the negative view of Manufacturing and indicate the low April PMI could be revised up.
There is no significant data from Canada in the week ahead although Crude Oil Inventories are expected to be released on Wednesday May 10.