Both technical and fundamental studies of the GBP to CAD exchange rate suggest further downside as being highly likely in the week ahead.
- On the charts GBP/CAD is breaking below a key trend-line
- On the calendar there is a speech from the chief of the Bank of Canada governor Poloz, on Monday June 6, earmarked as being positive
- Brexit fears meanwhile are cranking up as polls show the 'Leave' camp nudging into the lead.
Overall we are bearish on the pound sterling to Canadian dollar exchange rate.
Looking at the charts, GBP/CAD has broken below the trend-line for the move up from the April lows - a bearish sign which probably signals more downside for the pair.
GBP/CAD is in a longer-term down-trend anyway, so the move up during April and May may well have been just a correction, adding further weight to a bearish prognosis.
The fact the move up in April and May was formed of three waves in a classic zig-zag or A-B-C pattern is a further indication it was a pull-back in the dominant down-trend.
Finally the recent head and shoulders pattern on the 4-hr chart was further evidence the pair was in the throws of a major bearish reversal.
So overall the charts favour a continuation lower.
The general rule for trend-line breaks such as it happening right now, is that the pair falls roughly the length of the move before the break, after the break. In this case the pair moved from 1.9168 down to 1.8850. This is a move of 318 points. Extrapolated down from the break, this gives a target of 1.8482.
Given the 50-day moving average is at 1.8600, however, and is likely to prove a tough level to break below (moving averages tend to block the trend), our forecast is for a move down to 1.8610.
Confirmation would come from a move below 1.8750.
Scotiabank's currency strategist Shaun Osborne charts happen to be broadely in agreement with our analysis, strengthening our conviction, he comments:
“GBPCAD’s technical undertone continues to deteriorate… “
He too notes the break below the trend-line:
“The daily chart shows the GBP clearly sliding under trend support at 1.8877 now. A low close for the cross today will cast an even more negative technical look to the chart via an “evening star” top/reversal on the weekly chart…”
The Scotiabank analysts concludes that a break, “under 1.8755/65 is needed to extend the GBP drop in the short-term. If the 40- day MA fails to hold this downswing, the GBP may be looking at a retest of the 1.80/81 area. Sell GBPCAD rallies.”
Highlight of the Week Poloz Speech
On Saturday June 4 Bank of Canada (BOC) governor Poloz will be talking at the Canadian Economic Association Conference.
TD Securities expect Governor Poloz to maintain a “constructive outlook” due to the combination of fiscal and monetary stimulus in Canada, which is a rare example of a country where both are coordinating together. This lies in contrast to the majority where fiscal spending (ie public spending) remains austere whilst monetary spending is expansive.
TD say the Governor’s stance is likely to be consistent with:
“Our forecast for the overnight rate to remain unchanged for at least another year barring an (eg) unexpected slowing in the US economy.”
Assuming Governor Poloz’s speech falls in line with these expectations the Canadian dollar (loonie) may climb at the start of the next week. With pressure still on sterling as Brexit takes the lead in the polls, this is suggests a bearish fundamental outlook complementing the negative technical outlook.
On Friday June 10 Canadian Employment Change data will be released and is expected to show a 0.5k rise in May.
NBF Economics see the risk of a “sharp moderation in employment creation,” in the current quarter, adding, that:
“Alberta’s wildfires did not necessarily increase layoffs ─ in fact several oil producers continued to pay their workers even though many of the latter were displaced ─ but they likely limited hiring in the province. We expect employment to be no better than flat in May, which would keep the jobless rate unchanged at 7.1%.
Ivey PMI, a general broad sector gauge of business conditions, produced by the Richard Ivey School of Business, came out above expectations at 53.1 in the previous month, although there are no estimates for the next release on Wednesday June 3.
Another major factor in the valuation of the Canadian Dollar is the price of oil, to which it is highly correlated, as oil is the country’s largest export.
The rally in oil is a little bit long in the tooth, and it has reached a key 50 dollar level where more US production is expected to come online, however, there are no signs yet from the charts that the trend is changing and becoming more bearish, so it may still provide support for the loonie in the week ahead.