Pound to Canadian Dollar Forecast for the Week Ahead

Pound to Canadian Dollar Forecast for the Week Ahead

2 April 2016, 15:45
Vasilii Apostolidi
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GBP/CAD has been in a medium-term down-trend ever since breaking below the 1.97 level in February.
More recently it has been trading along an historic level of support and resistance at 1.8500, where it has made repeated but failed attempts to break lower.

The resulting price action looks very much like a right-angled triangle.

These patterns normally indicate the market will move lower once they have completed, in line with the trend before the pattern formed.

It is likely, therefore, that price action will eventually break lower.

Such a move would be confirmed by a break clearly below the 1.8500 level, confirmed by a move below 1.8450, to an initial target at 1.8375, where the S1 monthly pivot is situated.

Monthly pivots are often obstacles to further declines due to traders clustering buy orders around them in an attempt to trade the bounce.

A definitive break below S1, confirmed by a break below 1.8325, however, would see the exchange rate probably move down to the minimum target calculated using the height of the triangle at 1.8082.

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Releases in the Week Ahead
The current backdrop of a fiscal stimulus booster jab from the new pro-stimulus liberal government reducing the dependence on monetary policy, combined with the recent recovery in commodities (notwithstanding the 3.0% shock fall in oil on Friday), means the CAD currently benefits from a fairly supportive milieu.

The main release for Canada in the week ahead is the Canadian Labour Force Survey, which is expected to show an improvement in March employment as a result of the recent string of generally positive economic data for Q1:

“The string of positive economic data is set to continue with a rebound in employment following two weak months. The driver will be an unwinding of a large drop in full-time hiring that will only be partially offset by a pullback in the part-time sector. This will in turn drive the unemployment rate lower to 7.2%. Despite the likely positive tone of the report, we do not expect any lasting impact on the Bank of Canada,” say TD Securities in their assessment of the week that lies ahead.

NBF Economics concur that the survey should be upbeat but take a more cautious forecast of the unemployment rate remaining unchanged at 7.3%:

“In Canada, the highlight of the week will be March’s Labour Force Survey. The LFS has shown net job losses in the first two months of the year and we expect employment to bounce back in line with better economic growth (compared to the prior quarter) observed in Q1.”

NBF go onto explain that sectors such as education and accommodation could see a rebound, whilst in contrast construction might moderate:

“Sectors such as construction which saw outsized employment gains the prior month may show a moderation. In contrast, other sectors such as education and accommodation could see a rebound in employment after massive declines the prior month. All in all, employment may have increased about 18K in March, with an expected rebound in Ontario, leaving the nation’s jobless rate unchanged at 7.3%.”

Housing starts on Friday should provide a pulse for the housing market, with a forecast of a probable moderation to around 195K, “after the prior month’s surge.”

Bank-watchers will get welcome feed when Bank of Canada Deputy Governor Wilkins gives a speech on Tuesday, although the BOC is out of the spot-light a little, given the new government’s reflationary fiscal programme, which has to a certain degree unburdened the BOC of the responsibility to use monetary policy to stimulate the economy.

The pound in contrast has the opposite of a supportive milieu as it fights against the tide of Brexit risk which keeps pushing the currency lower in most pairs.

Although much of risk (about 8% according to estimates from UniCredit) has already been priced in and much damage has already been done, fresh declines continue as a result of the twists and turns of campaigners and events in the run-up to the referendum, on June 23.

More recently the Current Account fell to a record low after foreign investors took flight from UK government bonds, due to fears of Brexit hammer sterling and increasing borrowing costs. All this is weighing on sentiment going into April.

Manufacturing PMI also undershot expectations on Friday continuing a decline which has not stopped since PMI’s peaked in late 2013, and this further impacted on the pound.

However, from a data perspective the week ahead is dominated by PMI’s for the other two sectors.

Monday April 4 sees the release of Construction PMI, which is expected to decline further to 54.0 from 54.2 in February. This would be in line with the general down-trend, and would also constitute a more than 18-month low for the metric.

Services and Composite PMI are then released on Tuesday April 5. Services PMI is forecast to 54.0 from current 18-month lows at 52.7.

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