Canadian Dollar Forecast Yet Higher vs. the Pound after Mnuchin Trade Comments Give Loonie a Shot in the Arm
Above: Steve Mnuchin, file photo © The White House
- GBP/CAD steepens decline on Mnuchin comments
- Technicals point to 1.68/1.69 target say bank analysts
- Sterling hammered by renewed ‘no-deal’ fears
The Canadian Dollar gained a shot in the arm on Thursday after positive trade news helped offset marginally disappointing inflation data, giving the currency a boost which helped it to extend its rally against the weaker Pound, and reinforce the more bearish environment for GBP/CAD.
The Loonie gained after U.S. Treasury Secretary Steve Mnuchin said "I think we are close to an understanding with Mexico and Canada" on removing steel and aluminium tariffs.
The comments have resulted in a move higher by the Canadian Dollar according to analysts at Citibank, and helped support the currency despite lacklustre CPI data.
Data showed Canada core CPI retrace in April but still “remain elevated - after having been below for the past five months,” says Citi.
The technical outlook for GBP/CAD is bearish from a technical perspective, although the pair is also now starting to get closer to a major support cleft at around the 1.7150 level, where the downtrend could stall.
This support area coincides with the lower borderline of a long-term channel and the 200-day moving average (MA).
Other analysts are even more bearish. Shaun Osborne, a strategists at Scotiabank in Toronto, forecasts even more downside to the 1.68/1.69 region after the break below 1.7200-95 (the pair is already below that trading at 1.7180 at the time of writing).
“Combined, longer run price action strongly suggests the GBP has its work cut out to rally (above 1.77/1.78) and the retest of the range that we anticipated would result has happened—a little quicker than we expected. Have to think that weakness below 1.7295/00 would open up the downside quite a bit more for a push to the 1.68/1.69 area potentially,” says Osborne.
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Canadian inflation Misses, Brexit risks ratchet up for the Pound
Canadian headline CPI rose from 1.9% to the BOC’s 2.0% target in April, but core CPI undershot, coming out at 1.5% from March’s 1.6% year-on-year figure, which suggested a slowdown in demand.
Nevertheless, measures retraced, “to levels still around the BoC’s target,” according to Citi analysts, which downplayed the miss in the core gauge.
Inflation is a key determinant of when central banks raise rates which impact on FX markets. There is much debate about when the Bank of Canada (BOC) will change interest rates, with some expecting a hike this year but Citi’s analysts seeing a probable delay until 2020. Higher interest rates tend to appreciate a currency as they attract and keep greater inflows of foreign capital, drawn by the promise of higher returns.
The GBP/CAD pair has swung sharply lower over recent days both as a result of the Loonie strengthening but also Sterling weakness on Brexit uncertainty.
Downside was driven by a continued impasse in Brexit talks between the UK’s major political parties aimed at trying to arrive at a compromise which could win the backing of a majority in the House of Commons.
The fear is that with no compromise in sight the risks increase that the UK will leave the EU without a deal on October 31. The possibility of such an outcome has increased after senior government ministers including Liam Fox and Stephen Barclay, suggested that the UK would be leaving in October even if there was no deal in place.
The government is expected to present its deal to Parliament again for the fourth time at the start of June and if it fails to get the backing of the majority of MP’s the assumption is becoming, increasingly, that the UK will leave without a deal.
There is increasing pressure on the government from the Conservative Party to give up the pursuit of alternatives and leave with a hard Brexit on October 31 should May’s negotiated deal fail.
"Major headwinds for the Pound ahead, risks are high, as May's successor could be an absolute hardliner, but we are still positive this worst case scenario can be avoided since a majority of the parliament still opposes a hard Brexit," says Marc-André Fongern, Currency Strategistat MAF Global Forex.
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