Pound to Canada Dollar Recovery Could Last Based on Skandinaviska Enskilda Banken’s Analysis of Oil

Pound to Canada Dollar Recovery Could Last Based on Skandinaviska Enskilda Banken’s Analysis of Oil

3 March 2016, 14:10
Vasilii Apostolidi

Skandinaviska Enskilda Banken’s (SEB) analysis of the oil price trajectory hints at weakness for the Canadian Dollar, and possibly a rise in the GBP to CAD conversion.

The Scandinavian lender sees oil prices falling back down to $30 per barrel near term which will probably weigh on CAD owing to the tight relationship between the two assets.

A move lower in the Canadian dollar could aid the recovery in the pound to Canadian dollar exchange rate, particularly as our technical targets have been met. (More on this analysis below).

The Canadian dollar is one of the most sensitive currencies to the price of oil and therefore its highly likely that if the commodity weakens it too will fall in tandem.

Black gold will probably return to $30 as a result of continued rising global supply, writes Erica Blomgren, the author of the SEB note:

“The oil market is still running a solid surplus and global oil inventories are still rising robustly. Hence, we see downside risks dominating in the near-term with a test of low 30ish $/b in the spot and the curve to move back to a deeper contango again.”

The Scandinavian bank dismiss as secondary current themes pushing oil higher, such as OPEC-Russia talks, declining U.S crude production (which has fallen for the last 6-weeks), falling gasoline stocks, a rise in speculative long trades and falling Rig Counts.

The bank does, however, see the commodity eventually bouncing back to $40 per barrel: 
“Oil prices should recover later this year and we forecast an average Brent crude oil price of USD 40/b in 2016.”

GBP/CAD Meets Minimum Target

The weekly chart shows that the GBP/CAD pair has reached the minimum down-side target calculated from the double-top reversal pattern, at 1.8977.

Double tops are patterns which occur at the end of bull trends and mark reversals of the trend.

They are formed when the market peaks, falls back and then peaks again at a similar level to the first peak – painting on the chart what is essentially a ‘double top’.

The price is then expected to fall steeply to a target at the 100% extension of the height of the pattern lower.

The neckline is at the low of the intervening trough of the pattern; it must be breached to confirm more downside and in order to validate the pattern.

The minimum target is at the 61.8% extrapolation- rather than the 100% - due to the significant properties the 61.8% ratio discovered by the Italian Mathematician Fibonacci.

Since the minimum target on GBP/CAD has been met (at 1.8977), it lessens the chance of more downside, and increases the chances of either a consolidation or recovery.

Such a move would dovetail neatly with SEB’s bearish oil analysis.

The one fly in the ointment to this view, is MACD indicator in the bottom pain, (a momentum indicator) which remains in bearish territory, but nor is that a game changer either. 

Death Cross

One stronger signal that the recovery may not come to pass, however, is the potential Death Cross forming on the daily chart.

A Death Cross happens when the 50-day MA moves below the 200-day MA when both are declining.

It is a very bearish medium-term signal, and we are millimetres away from forming one on GBP/CAD.

Also, the pair may have fulfilled the 61.8% minimum target from the double top, but it still has not met the 100% target at 1.8520ish, and there is a still candle-lit possibility that it will.

So for intrepid bears willing to front some risk, a break below the 1.8650 level would confirm a move down to 1.8520 at the 100% target, especially as it will be complemented by the Death Cross. 

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