Pound to Canadian Dollar Signalling Probable Resumption of Down-trend During Week Ahead

An analysis of the week ahead for GBP/CAD, including forecasts. 

The Pound-to-Canadian Dollar chart is showing there is probably a 66% chance the week ahead will close lower than the level at which it opened.

The exchange rate has formed two up-weeks in the midst of a steep down-trend, producing a signal that the next week will probably on balance actually be a down-candle.

The heightened probability of a continuation lower provides a backdrop against which analysis can be evaluated and may help traders to position themselves in line with favourable odds.

There is also a possibility that the exchange rate could fall all the way down to its next target at 1.8511 which corresponds to the 100% extrapolation of the height of the double top pattern lower (see chart).

A double top is a reversal pattern which forms at the end of up-trends, when prices rise to a peak pull-back and then rise again to form another peak, before breaking lower and extending their trend down.

If the pattern breaks lower, it is normally expected to reach 61.8% of the height reflected down form the neckline, as a bare minimum – but often reaches as far as 100% or further.

GBP/CAD has reached as far as 61.8% and there is a possibility it could fall even lower to the 100% target at 1.8511, however, for confirmation of such a move I would ideally like to see a break below the 1.8673 lows.

Crude Nears 200-day Moving Average  

The Canadian Dollar is dictated by the price of oil and currently oil is rising, with Brent now above $40 per barrel and WTI at $39.

WTI is in a fairly strong up-trend, but it has almost reached its 200-day MA at $40.59, and if it does then there is a good chance it will at the very least pause, pull-back or consolidate at that level. There is also the possibility of a complete reversal too.

The observation that Crude is nearing a major resistance level which is likely to slow down its rally and possibly even lead to a correction or reversal indicates the possibility of weakness, or at least a lack of strength in the Canadian Dollar.

Oddly this slightly contradicts the signal from the weekly charts that next week is likely to be a bearish week for GBP/CAD, unless the weakness is supplied predominantly by the pound, or oil simply breaks above the 200-day on surprise news, such as an Opec deal to cut production. 

Outlook for Canadian Fundamentals

The main concern for analysts apart from whether the rally in oil will extend higher, is whether the strengthening Canadian dollar - which has risen from 1.46 to 1.32 in less than two months - could now be so strong it might be stymying the economic recovery. This could be acting as a counter-balancing force against its own further gains.

Big hopes are riding on the March 22 Federal Budget which is expected to be pro-stimulus, and some economists are predicting this should further support the Canadian Dollar looking forward, indeed this is the corner-stone of David Bloom of HSBC’s forecast of USD/CAD in the 1.25 by year end.

In terms of nearer term factors, data out in the week ahead falls heavily on Friday, when Retail Sales in January will be released (-2.2% prev) , February CPI (0.2% mom and 2.0% yoy prev), and BOC Price Index Core (-0.3% mom and 2.0% yoy prev).

Pound to have Intense Week with Budget and BOE Meeting

The pound has a potentially volatile week ahead with the Budget, Unemployment data and the BOE rate decision.

The BOE is unlikely to change rates, but there is a possibility it could provide more fuel to the Brexit debate in the minutes afterwards.

However, this is likely to be pro-sterling given the stance of Carney and his deputy at the recent parliamentary committee on Brexit where they appeared to endorse membership and highlighted the risks to the city of an exit.

According to a paper edited by Vicky Redwood, chief economist at Capital Economics, the week is likely to be rather uneventful:

“The MPC minutes released on Thursday, alongside the rate decision, should show that heightened uncertainty about the economic outlook makes the decision to leave rates on hold unanimous.”

As for the Budget, according to Capital Economics’ Scott Bowman it unlikely to support growth since the chancellor is certain of continuing with austerity, a policy which does not mix well with loose monetary policy:

“With the Chancellor constrained by his fiscal mandate, the Government is unlikely to provide any support for the recovery or take advantage of low gilt yields to increase investment.”

“Remember, the Government’s fiscal mandate calls for a surplus on public sector net borrowing (PSNB) by 2019/20. The Chancellor may even increase austerity further if the OBR presents him with detrimental forecasts.

“This contrasts with the extremely loose stance on monetary policy. Indeed, with the MPC certain to keep interest rates on hold on Thursday, Bank Rate is set to have been at a record low of 0.5% for seven whole years. This doesn’t necessarily make for the ideal policy mix.

“Indeed, if Mr Osborne does announce more austerity, there will probably be renewed questions about the wisdom of his fiscal rule. The rule means there is little flexibility to respond to downturns in the economy. And with Bank Rate close to its lower bound, monetary policy is already doing a great deal to support the recovery.”

Accepting Capital Economics’ analysis, the budget is unlikely to provide support for sterling – and indeed this could be a major risk factor.

Another possible risk factor may be the unemployment and wage data if it shows a dramatic fall, which is possible given the general slow-down in the economy witnessed in recent data.

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