The Pound-Canadian Dollar Rate Eyes OPEC+ and Virus Count after Finding Support on Charts

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The Pound found support on a cluster of moving averages Tuesday after ceding close to 200 points to the Canadian Dollar to open the week, although oil prices and coronavirus infection numbers are key to the trajectory from here.

Canada's Dollar bounced strongly at the open of the week as investors serenaded a continued decline in the number of new coronavirus infections declared by some major economies and plans to lift 'lockdowns' of two economies. The coronavirus has appeared to lose momentum in some parts of Europe, the U.S. and also Canada over recent days, encouraging hope among investors that the unprecedented implementation and enforcement of social distancing measures is now beginning to pay off. 

As coronavirus momentum wains the big Dollar has developed growing pains across Canada's southern border, while risk assets like stocks, some commodities and many of the currencies that underwrite them have all built gains. This has been a more favourable environment for the Canadian Dollar than it has Pound Sterling given the Loonie's higher 'beta' correlation with risk appetite, which has seen the Pound-Canadian Dollar rate retreat from near multi-year range-highs that were in sight last week. 

"Trend strength signals are weak and the cross is showing little in the way of strong directional intent after a large weekly doji candle formed," says Juan Manuel Herrera, a strategist at Scotiabank.  "We think the GBP is a buy on dips from a technical point of view but mid-range price action is no real incentive for either buyers or sellers at the moment, rather suggesting more drift." 

Above: Pound-Canadian Dollar rate at daily intervals with 21, 55 and 200-day (light blue) moving-averages .marked out.

The Pound-Canadian Dollar rate formed the "doji" candle referred to by Herrera when it closed last week on more or less the same level it began trading at last Monday, leaving it without a clear short-term bias. 

Since then the Pound has fallen nearly 200 points this week but found support on the 21 and 55-day moving averages located between 1.72 and 1.7226 Tuesday. Monday's fall was seen coming although the trajectory from here is a coin toss given an absence of strong directional signals from the charts, lingering uncertainty about the outlook for oil prices and the risk of the coronavirus gaining renewed momentum. 

Sterling's oyster is the world between 1.72 and tough resistance at 1.78 so long as those moving-averages are left intact. Failure of the averages above 1.72 would leave the Pound at risk of a return to the 1.70 level that's often provided good support in recent months, and potentially even vulnerable to a retreat back toward the 200-day moving average near the 1.68 handle. 

A fall to 1.68 would put Sterling comfortably on the south side of the post-Brexit-referendum range but any such journey might prove to be a short-lived one because Scotiabank's Herrera says the long-term charts are leaning bullish and the technical outlook favours a buy-on-dips strategy. 

"GBPCAD is stuck mid-range between support near 1.69 and resistance at 1.78," Herrera says in a Monday research note. "The longer term chart signals are leaning more GBP-bullish we think and these point to firmed underlying support for the GBP near the range base. But the 1.78 zone remains a clear block on upside progress for now."

Above: Pound-Canadian Dollar rate at weekly intervals with Fibonacci retracements of referendum downtrend marked out.

Oil prices and coronavirus infection numbers will play a key role in dictating the trajectory of the Pound-Canadian Dollar rate into Friday, the beginning of the Easter weekend for those countries that observe it, while technical signals coming off the charts provide good indications of the likely confines to price action over the balance of the week.

Any renewed momentum behind the pneumonia-inducing virus would be taken badly by all non-U.S. currencies but likely more so by the Canadian Dollar than Pound, given Sterling's lesser sensitivity to commodity prices.

Virus infection numbers are a real wild card but so too are oil prices, which could be either a positive or negative driver for the Loonie. That oil trajectory depends largely upon whether the Organization of Petroleum Exporting Countries (OPEC) and Russia are able to strike an agreement to cut production sufficiently enough to lift prices off the 18-year lows struck in 2020. A virtual meeting of the various energy ministers is set for Thursday.

"Yield differentials are not what’s moving the Canadian dollar. Instead it’s the oil price collapse, courtesy of the global recession and the Saudi-Russia price war, which is hammering the currency, taking it to depths last seen in 2015. Indeed, a barrel of Western Canada Select oil can now be bought for as little as US$4. Just so our readers do not think this is a typo, note that even an average-size rhubarb pie at your local grocery store costs more than a barrel of WCS," says Stefane Marion, chief economist at National Bank of Canada Financial Markets. 

Above: USD/CAD rate at daily intervals alongside WTI crude oil price (black line). 

OPEC meetings are often preceded by a repetetive pantomime, a part of which plays out in the press with initial reports that "consensus" may be close, and then not so close before the crux of the remaining impediments to progress manifests itself between the various lines spoken by the relevant actors. This time that pantomime has the OPEC+ cartel attempting to draw the White House and Ottawa into helping to 'stabilise the market,' with a gambit aimed at securing de facto commitments to prevent North American producers from increasing production if and when prices recover from the collapse induced by the coronavirus as well as the price war between Russia and Saudi Arabia. 

The Ft reported at the weekend that if Russia and Saudi again fail to strike an agreement then the White House and Ottawa might consider placing tariffs on oil pumped from those countries, which would mean higher prices at the pump for U.S. and Canadian consumers but would also protect much of the jobs, GDP and tax revenues that are risked by a protracted downturn in North American prices. That might effectively shut two of the world's largest producers out of the world's largest market for crude oil, possibly creating a worse headache for them than would be the case if each accepted their respective share of the 10mn barrels per day of cuts the cartel is squabbling over. 

"Tariffs or not, we still think oil prices will remain grounded by this unprecedented global recession which, in the IMF’s estimation, will be “as bad if not worse” than the 2008/09 downturn. The downgrade to our 2020 forecasts for world GDP growth and OPEC/Russia price war prompted us to lower our projections for oil prices. WTI oil is now expected to average around $28/barrel this year (versus roughly $47 in our previous forecast). That translates to lower path for the Canadian dollar than anticipated earlier," says Krishen Rangasamy, a senior economist at National Bank of Canada Financial Markets. 

Above: USD/CAD rate at weekly intervals alongside WTI crude oil price (black line).