British Pound to Canadian Dollar Forecasts Turn Decidedly More Bullish

canadian dollar 3

The GBP to CAD exchange rate has advanced above a key technical level in sympathy with the general trend of an appreciating sterling. 

We wrote on the morning of Wednesday the 19th that the GBP/CAD's charts were showing the pound’s counter-trend rally versus the Canadian dollar had reached within a hair’s breadth of a critical level at the May 10 1.8753 highs.

"If the exchange rate breaks above those highs it will be a very bullish sign as it will show a reversal in the peaks and troughs of the trend, with a bias then to further upside," we suggested.

The forecast was correct as the break lead to a massive spike in supply of CAD onto the market.

The rally has now taken us to yet another key level - the 100 day moving average where we expected further significant GBP selling and CAD buying in anticipation of a reversal lower, as often tends to happen when a price runs into the 100 day M.A.

This did happen as the rally stopped at the 100 day M.A.

However, the market did squeeze in a close above this key area and Thursday's opening above this point bodes well for the outlook.

GBP to CAD forecast

What often happens is a rally can push notably higher when opposing forces in the market are cleared out - this could well be the case for GBP/CAD now.

EU Referendum Polls Behind GBP Spike

Pound sterling remains in the ascendency against the Canadian dollar as recent referendum poll results signalled an increase in the lead of the Remain vote in the forthcoming June referendum. 

The latest poll from Ipsos MORI for the Evening Standard confirmed a fresh lurch towards the Remain camp, primarily driven by Conservative voters.

This subset of the electorate would be expected to be more Euro-sceptic than those on the left.

"Many traders have been short sterling on the premise that the close polls would make pre-referendum trading messy and the widening gap has encouraged aggressive short covering," says Kathy Lien, Director at BK Asset Management.

Canadian Dollar Undermined by Economic Fundamentals

Any gains in the price of oil which might have supported the CAD side of the pair were nullified by the release of disappointing March Manufacturing Sales data, which showed Manufacturing Sales coming out at -0.9% and the prior February print being revised down to -4.0% from -3.3% previously.

The negative effects on the currency may be short-lived, however, according to a note from NBF economics, which dismissed the downward revision in February:

“Even considering the prior month’s sharp downward revisions, March factory sales were not as bad as feared by consensus. Furthermore, March’s nominal figures were heavily influenced by changes in prices and exchange rate.”

In Aerospace for example, sales were lower because they are reported in US dollars, which depreciated substantially against the stronger Canadian dollar in March.

They argue that stripping these price effects out gives a very different inference:

“After changes in prices and exchange rate are removed, it is reassuring to see that in real terms, sales actually edged up.”

The note ends on a positive:

“In Ontario, shipments in the automotive industry rose sharply in Q1 (together with the number of new vehicles produced) despite declines in February and March (middle chart). Overall in manufacturing, real sales have contributed to economic growth in Q1 with a 5.7% annualized increase, the best performance since Q3 2014.”

RBC economics also noted that “controlling for the effect of prices” sales actually edged up by 0.1% in March, following a -2.6% drop in February (revised from -2.0%).

They note, however, that in the three months prior to February and March Manufacturing Sales had made notable gains.

“Sales declined in 16 of 21 industries in all although were led by a (partly price-related) 7.0% drop in the volatile aerospace component and a 5.6% drop in primary metal sales. “

RBC said the lower-than-expected Sales would not noticeably impact on GDP.

“Looking through the monthly volatility, we continue to expect that underlying sales trends remain positive; however, the recent data flow, on balance, may still raise questions at the Bank of Canada about the durability of the expected external-demand fuelled ‘rotation’ in the drivers of growth to non-energy sectors of the economy,” ends the note.