Pound-to-Canadian Dollar Rate Week Ahead Forecast: Bearish Trend to Extend
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- GBP/CAD breaches trendline, steepens decline
- More downside expected in days and weeks ahead
- Pound to be impacted by leadership race; Canadian Dollar by housing data
The GBP/CAD exchange rate is trading at 1.6888 at the start of the new week, after falling over a percentage point in the previous week. Studies of the charts suggest that the exchange rate is set to continue declining over the next five days.
The 4 hour-chart shows the pair in strong downtrend which now looks all the more bearish following the break below the major multi-year trendline. This is normally a very negative sign suggesting a longer-term change of trend.
Given the old adage that “the trend is your friend” this bear is likely to continue and we see a probable move down to the next bearish target at 1.6760 in the days ahead, possibly even lower given the speed of declines so far, with 1.6700 and 1.6650 also potentially in the firing line in the week ahead.
We use the 4-hour chart to determine the short-term outlook, which includes the coming week.
The daily chart is just as bearish and shows more clearly the significance of the recent trendline break.
As a rule of thumb, when prices break below a trendline the follow-through lower is usually the same length as the move immediately prior to break (X) or 61.8% of the length of ‘X’.
This suggests the pair has quite a long way to fall, and we expect a move down to medium-term target of 1.6610, at the 2018 lows over the next month.
The one ‘fly in the ointment’ to the outright bearish case, is the RSI momentum indicator which is in oversold territory, defined as below 30.
This suggests increased risks that the pair may plateau because it is so oversold, however, it is not necessarily a sign of the end of a trend. RSI can remain oversold for long periods during downtrending markets.
The pair can still go lower, but it may take pauses on the way down. At the moment RSI is at 28 which is only just oversold so we are not concerned, however, if it drops below 20 then it may be a sign the pair is about to correct.
We use the daily chart to determine the medium-term outlook, which is between about 1-4 weeks in the future.
The weekly chart shows the long-term trend is bearish, and the pair is likely to simply continue declining. If it manages to pierce the 2018 lows the next target - the 100% extrapolation of ‘X’ is at around 1.6360.
We use the weekly chart to give us an idea of the longer-term outlook, which includes the next few months.
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The Canadian Dollar this Week: Housing Data
The most important release for the Canadian Dollar are housing starts and building permits for Toronto (nationwide figures to follow a week later) nevertheless, these are usually a leading indicator of what the broader data will show.
Housing is also one indicator of growth, and so could either support the current quite positive outlook or sow seeds of doubt.
Recent employment and trade data, especially, have been upbeat as can be seen in the charts below, and this has supported the currency.
Because of the positive outlook, the Bank of Canada (BOC) is one of the few central banks not expected to cut interest rates in the year ahead, and this explains its idiosyncratic performance. Higher relative interest rates are positive for currencies because they attract more foreign capital inflows.
Property market data could thus either solidify optimistic BOC expectations or not.
Housing starts are forecast to rise 200k in May and building permits by 0.5% in April, when they are released at 13.15 and 13.30 respectively on Monday, June 10.
“Reports from Toronto and Vancouver real estate boards suggest that the national housing market will likely continue to firm in May,” says TD Securities a Toronto-based investment bank, in a note on the data.
The economic backdrop is positive in Canada.
“All in all, recent data points suggest that economic backdrop is indeed improving, in line with the Bank of Canada view. After two-quarters of sub-0.5% prints, we expect real GDP growth will average closer to 2% over the rest of the year,” says TD Securities.
The BOC’s official stance on monetary policy is neutral with an upside bias.
“While the outlook is laden with significant risks, the Bank of Canada believes that “the degree of accommodation [provided at present] remains appropriate”. Thus, even as the market expectations intensify for the U.S. Federal Reserve to cut policy rate this year, with similar, if less intense moves seen here as well, we expect the Bank of Canada to stay pat,” says TD Securities.
The Pound: Politics and Labour Market Data
Brexit politics are still likely to have the greatest impact on Sterling, with UK monthly GDP, unemployment and trade balance as the main hard data releases.
The next step in the conservative leadership contest will unfold on Monday, June 10, when candidates must declare at least eight nominations from fellow Conservative MPs in order to stay in the race. This will probably result in many of the weaker candidates being knocked out.
After that all candidates will need the votes of 17 Conservative MPs to stay in the first round ballot and at least 33 – or 10% of Tory MPs – to stay in the second round of voting.
At the moment, the leading contenders are Johnson, Gove, and Hunt, but if that changes - which is unlikely - and one of the big names gets knocked out it could impact on Sterling.
Johnson appears to be in favour of endorsing a ‘leave at all costs’ Brexit on October 31.
Michael Gove has a softer stance, aiming for a Canada-style free trade agreement and a possible further delay if necessary, which has infuriated the right of the party.
Jeremy Hunt has suggested he might be against leaving without a deal, although would so “with a heavy heart”.
The main data release is April GDP which is forecast to show a -0.1% fall compared to the previous month and a 1.7% rise compared to a year ago, when it is released at 9.30 BST on Monday, June 10. Any unexpected fall in GDP will probably weaken the Pound.
Unemployment data is expected to show the unemployment rate remain at 3.8% in April, when it is released at 9.30, on Tuesday, June 11.
Also important is average earnings which are forecast to rise by 3.1% (excluding bonus) and 3.0% (including bonus). If earnings are lower-than-expected, it will probably lead to a sell-off in Sterling.
The trade balance is expected to show a narrower -£12.96 deficit when it is released on Monday at 9.30. Generally, this is considered a positive background factor for the Pound.
Industrial and manufacturing production are expected to show a -0.7% and -1.0% decline in April when data is released on Monday, also at 9.30.
Since these are indicative of GDP growth they can also have an impact on the Pound, weakening it if they undershoot expectations and vice versa if they overshoot.
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