Pound-to-Canadian Dollar Rate Week Ahead Forecast: Bullish Signals

Image © Bank of Canada

- GBP/CAD to extend uptrend if highs breached

- Longer-term pattern completion also bullish

- Canadian Dollar to be moved by global slowdown and oil price

The GBP/CAD exchange rate is trading at around 1.6527 at the start of the new week after rising 0.42% in the previous week. The pair is marginally biased to continue rising despite recent weakness.

The 4 hour chart - used to determine the short-term outlook, which includes the coming week or next 5 days - shows the pair pulling-back within a rising channel.

The channel remains intact and so the bias is for more upside. If the pair can break above the 1.6692 highs it will probably confirm an extension higher to a target at about 1.6825.

A break below the 1.6416 lows, on the other hand, would flip the trend to bearish and suggest lower prices on the horizon.

The daily chart shows the pair continuing to reverse and rise.

The short-term trend is now established even if it is 'young'. Also, given the adage ‘the trend is your friend’ it is biased to continue.

The break above 1.6400 and the ‘lower high’ of the previous downtrend in late July, was a big game-changer for the pair, reinforcing the new uptrend.

A break above the 1.6692 highs would provide the green-light for an extension higher. On the daily chart, the next target might be 1.6940 and the level of the 200-day moving average (MA).

The daily chart is used to give us an indication of the outlook for the medium-term, defined as the next week to a month ahead.

The weekly chart shows the pair rising after finding support at the 2017 lows.

We think the trend has changed and the pair will go higher with an eventual upside target at the level of the 200-week MA at 1.7330.

The pair recently completed a ‘measured move’ pattern which began at the 2018 highs. The final c-d leg has reached the same length as the a-b leg suggesting it has finished unfolding and increasing the probability the trend has changed.

The weekly chart is used to give us an idea of the longer-term outlook, which includes the next few months.

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The Canadian Dollar: What to Watch

The main drivers of the Canadian Dollar in the short-term are expected to be global trade concerns and oil prices.

Previously Canada had stood out as an economy unaffected by trade wars and this provided support to the currency, but there are indications the global slowdown in manufacturing has now also impacted on Canada where recent manufacturing data is showing the sector in decline.

The problem has led to increasing expectations the Bank of Canada (BoC) will cut interest rates sometime this year so as to stimulate the economy. This would have a negative impact on the Canadian Dollar since lower interest rates tend to attract lower net inflows of foreign capital.

“The weakness in manufacturing will present a case for monetary easing to the BoC,” says TD Securities, an investment bank based in Toronto. “Clearly, Canada is not immune to the global manufacturing slowdown and some insurance may help offset the negative impacts. As detailed in our newly released Quarterly Economic Forecast, with trade tensions, a softening global outlook, and uncertainty holding back investment, we expect the BoC to cut rates later this year.”

Whilst markets had been hopeful China and the U.S. trade relations were easing, the news on Friday that a delegation of Chinese negotiators had returned home early from talks in the U.S. led to a recapitulation of risk appetite.

Particularly damaging were reports that Chinese delegates had snubbed an invitation to visit farms in Nebraska and Montana - organised as a gesture of goodwill - citing “an adjustment of their agenda” as reasons for cutting short their visit and returning home.

The week ahead is unlikely to be especially negative for risk appetite, however, given the whole period will be taken up with the UN summit in New York, where most foreign dignitaries will want to appear diplomatic.

The price of oil is another factor which could impact on the Canadian Dollar. It impacts on the price of Canadian oil, which is the country’s main export, and higher oil prices increase aggregate demand for the currency, pushing up its value.

Oil prices are unlikely to decline substantially in the near-term especially due to recent attacks on Saudi production.

The Saudi authorities are playing down the impact of the drone strike, saying it will not affect production.

Analysts are sceptical. They estimate the damaged Aramco plant has a month’s worth of supply to fall back on. If the oil plant is not fixed within a month, however, there will be disruptions to supply, and the price of oil will probably rise.

The “actual longer-term impact of the attacks on the Saudi oil infrastructure is still difficult to judge because the country is likely to play down any potential problems given the importance of its customer relations and the upcoming IPO of Saudi Aramco,” Commerzbank wrote in a note on Friday.

Oil expert Amy Myers Jaffe believes that the market should be far more skeptical of Saudi claims on output recovery. The attack on the Saudi's Abqaiq oil facility was once thought of as "unthinkable” she said. “Now, disruptions of massive amounts of supply in Saudi Arabia, Iraq, the UAE and Kuwait are increasingly possible,” she said.

Oil outages in other countries may also constrain supply keeping oil prices high.

In Nigeria, Libya, Iran and Venezuela production has been impacted by either U.S. sanctions, wars or political infighting.

Last week, Nigerian oil production was hit after disruptions from rebels at the Nembe Creek Trunk Line, which has been repeatedly targeted in the past few years.

U.S. sanctions against president Maduro of Venezuela have led to a domestic supply glut and a bottleneck of un-sellable crude with nowhere to go.

Whilst higher oil prices do not always correlate with a stronger Canadian Dollar, the outlook suggests the possibility of oil supporting CAD rather than not.

Time to move your money? Get 3-5% more currency than your bank would offer by using the services of foreign exchange specialists at RationalFX. A specialist broker can deliver you an exchange rate closer to the real market rate, thereby saving you substantial quantities of currency. Find out more here.

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