Pound to Canadian Dollar: Forecast for Week Ahead
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The GBP/CAD pair is consolidating in a range which will probably extend through next week until it breaks to the upside.
Fundamentals
The pound to Canadian dollar exchange rate has bounced from off of its post-Brexit lows and has now started moving sideways in a range visible on the four-hour chart below.
The range will probably play out some more before the exchange rate eventually breaks out to the upside.
It will probably move up roughly the same distance as the height of the tallest part of the range, which is 4 cents.
This gives a target between 1.77-78.
Outlook for Oil and Impact on CAD
Oil is a major contributing factor in the value of the Canadian dollar (loonie) which has averaged a 78% correlation (vs USD) with the commodity over the last ten years.
Whilst we do not have research showing the correlation between oil and GBP/CAD, we can estimate it will be similarly close given the general importance of oil to the Canadian economy and the not vast disimilarlity between GBP and USD.
Recently crude has slumped to $45 a dollar from $50 and this has weighed on CAD, and been a significant part of the reason for sterling’s recent recovery from off of the post-Brexit 1.67 lows.
Yet despite this pull-back analysts remain bullish oil expecting it to resume its medium-term up-trend eventually – although in the week ahead the down-trend may still push lower.
Bank of America Merrill Lynch’s Head of Research, Tomos Rhys Edwards, for example sees the commodity recovering after what he describes as the “summer sell-off”:
“We have repeatedly warned in recent months about the risks of a summer sell-off in global oil prices to $39/bbl. After all, we have not changed our outlook for Brent or WTI since the first week of January. And so far, WTI crude oil prices have tracked a path that is surprisingly similar to 2016. Even then, the key difference to last year is that crude oil supply around the world is now falling at a pretty fast rate, with global output set to contract by 300 thousand b/d YoY in 3Q16 and set to grow by only 230 thousand b/d on average in 2017. While we acknowledge that inventory levels are very high, we still see the oil market moving into deficit, with Brent prices rebounding to $55/bbl by year end.”
Recent central bank commentary saw the inflation outlook as ‘evenly balanced’ and trimmed growth expectations.
The Alberta Wildfires had a major negative impact on growth, but this is expected to be made up in 2016.
The government’s fiscal stimulus programme will also provide a crutch for growth over the next few years.
We have to wait till the end of the trading week for significant data from either of the currencies in GBP/CAD.
The Canadian dollar has Core Retail Sales in May, which are forecast to rise more slowly at 0.3% compared to 1.3% in April.
The UK sees important data in the form of July Services, Manufacturing and Construction PMI coming out on Friday.
These will provide one of the first snapshots of how the economy is coping after Brexit, and will be a highly influential factor in shaping market sentiment.
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