While the outlook for the GBP to CAD conversion remains technically bullish for the week ahead there remains the risk of consolidation in the near-term.
The week ahead is likely to see further upside for the GBP/CAD pair as the pound extends its short-term rally against the Canadian dollar, however, a possibility of an extended pause is also possible, as the pair recovers after getting ahead of itself.
Whilst lessening Brexit concerns may play a part in driving sterling, and therefore the pair higher, as they did on Wednesday when an IPSOS mori poll showed the ‘Remain’ camp extend its lead to 18% over ‘Leave’, a substantial amount of Brexit risk may now have been recouped.
A possible new driver of pound strength could be increased expectations that the Bank of England (BOE) will increase interest rates sooner than was previously expected, perhaps even by the end of the year. Higher interest rates tend to benefit a currency because they attract foreign investors to park their capital in the country in order to benefit from the higher interest and this involves exchanging into the local currency.
Thursday’s much higher than expected UK Retail Sales in April showed the British consumer will not be bowed, and this improved the outlook for growth, which had been feared might be stuttering. The BOE will need to see healthy growth in order to consider raising interest rates.
Expectation-beating levels of weekly pay in the first quarter, which rose to £499 per week - pay including bonuses that is - also improved the outlook, however pay ex bonuses came out at a disappointingly slower 2.1%. The BOE has said it wants to see a sharper rise in take home pay to consider raising interest rates.
The key event next week for sterling, therefore, could be Thursday’s second estimate for first quarter GDP. The preliminary estimate showed 0.4% GDP growth, which was in line with analysts’ expectations but slightly disappointing - if the initial result is revised up on Thursday May 26 GBP/CAD could start moving higher again.
From the Canadian dollar’s perspective, the main event in the week ahead is the Bank of Canada (BOC) meeting on Wednesday May 25.
The BOC are not expected to cut interest rates at the meeting. For a start there is less pressure on them to stimulate the economy using monetary policy as the new liberal government has launched a large fiscal stimulus programme which will take over that role.
Despite the trade gap hitting a record high in March, due in no small part to the stronger Canadian dollar, the outlook for growth and employment appears to be steady, with unemployment sticking to the 7.1% level for two months running, and down from 7.3% in the February.
Data out on Friday showed both Core CPI and Core Retail Sales beat expectations but headline figures both undershot expectations by 0.1% each.
Ultimately, many analysts will be listening carefully for signs the BOC consider the Canadian dollar too strong, which might indicate pressure to lower rates in the future.
Broker TD Securities comment as follows on the BOC meeting: “The soft finish to Q1 and slowdown in non-energy exports will contribute to a more cautious communique, though there remains universal consensus that the Bank will leave rates on hold (see our preview).
However, should the US economy fail to bounce back in Q2, weaker exports and the relative strength of the Canadian dollar will introduce the need for further fiscal stimulus and could open the door to monetary easing later in 2016.”
The GBP/CAD counter-trend rally has moved rapidly higher on the back of sterling strength due to diminishing Brexit fears, after an IPSOS Mori poll on Wednesday showed the Remain vote pulling ahead with an 18% lead.
Technical Outlook for the Pound v Canadian Dollar
Market structure has changed after the break above the 1.8753 highs, with a much more bullish outlook in the medium term.
In the week ahead, however, it is possible the pair could pull-back and consolidate.
As Shaun Osborne of Scotiabank says, the exchange is overstretched and due a correction after its rapid ascent:
“GBPCAD’s rally has stalled above 1.91 and it appears set to consolidate its recent move from 1.85. Momentum indicators had reached exhaustion levels in overbought territory and have since begun to fade. The swift nature of the recent rally provides for little in terms of support, with some minor congestion around 1.89 and a 9 day MA at 1.8758.”
Eventually, however, we expect the pair to resume its up-trend and pushing higher, and a break clearly above the 1.9200, would almost certainly confirm a move up to 1.9400.
Trader Sentiment Turns 'Less Bullish' Towards the Canadian Dollar
Markets are turning less confident on the Canadian dollar the latest data from the Commodity Futures Trading Commission which monitors FX markets and reports on the positions being held by traders.
Sentiment towards the Canadian dollar has improved notably through 2016 - in January there were over 50K net contracts positioned for further Canadian dollar weakness.
The USD/CAD exchange rate was at 1.45 at this time. The Canadian dollar has since strengthened and pushed the rate back below 1.30.
Bets on the Canadian dollar have turned positive as a result with positioning on USD/CAD turning to a net positive of above 25K.
However, it appears this improvement in sentiment is softening.
Bullish CAD sentiment has softened a modest $0.3b to a net long $1.8bn position, its first deterioration since late January.
The deterioration in sentiment ends a 15 week run of improvement that provided for a cumulative $6.7bn swing off the extended bearish levels from late January.
“We note that this week’s turn resulted from a paring of CAD risk to both sides with a decline in longs and shorts — suggesting uncertainty on the part of market participants,” says Shaun Osborne at Scotiabank.
Canadian Data Hotspots
The only other major event for the Canadian Dollar is the Bank of Canada’s monetary policy meeting on Wednesday May 25 will have their monetary policy meeting. They are not expected to change their policies. Interest rates are already low at 0.5%.
The soft finish to Q1 and slowdown in non-energy exports will contribute to a more cautious communique, though there remains universal consensus that the Bank will leave rates on hold (see our preview).
However, should the US economy fail to bounce back in Q2, weaker exports and the relative strength of the Canadian dollar will introduce the need for further fiscal stimulus and could open the door to monetary easing later in 2016.