Canadian Dollar Forecast: CAD to Gain vs Pound, US Dollar and Euro

The commodity-linked currencies from Australia, New Zealand and Canada have entered the closing stages of Novemeber on a soft footing as investors show little appetite to follow through on the strong rally seen mid-month.

"The so-called dollar-bloc currencies all rallied in the wake of a surprise rate cut by China and the resulting rally in commodities and growth-sensitive assets. Despite the fact that investors see scope for further easing by China, lower oil prices and profit taking seem to have limited the upside of this group of currencies for now," says analyst Omer Esiner at Commonwealth Foreign Exchange.

A look at the Canadian dollar at the current time shows:

• The British pound to Canadian dollar exchange rate (GBP/CAD) is at 1.7721.
• The euro to Canadian dollar exchange rate (EUR/CAD) is at 1.4072.
• The US dollar to Canadian dollar rate (USD/CAD) is at 1.1276.

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Canadian Dollar Looks Strong Medium-Term vs the Pound Sterling and US Dollar

Despite the current weakness in the CAD we must note that the currency is the only major to have put in any decent strength against the US dollar as of late.

Indeed, gains against the USD have been matched by gains against the euro and pound sterling reflecting the currency's run of good form.  

Stronger than expected Canadian inflation data, combined with China’s decision to loosen policy were the key catalysts that helped to drive CAD to month‐to‐date highs in the mid-month session.

"Oil is also off its lows which is encouraging for CAD traders. This week the focus will be: broad market developments; domestic retail sales and Q3 GDP, as well as expectations for the BoC rate decision on December 3rd," says currency analyst Camilla Sutton at Scotiabank.

Interestingly all technical studies have now shifted to sell signals on the USD/CAD (ie. a stronger Canadian Dollar) and the potential move lower towards the October 31st open of 1.1184 is possible.

"For short‐term traders we are biased to be positioned for this test; with a stop at Friday’s open of 1.1305," forecasts Sutton.

Concerning the pound sterling to Canadian dollar exchange rate (GBP/CAD) we note that the pair is at the bottom of its 2014 range:

The implications of the successful support at the level around 1.7600 is that a rally to the top-end of the range is now possible for the GBP.

However, look at the September recovery - it was strong and determined. Looking at the current rebound we note the enthusiasm for sterling is benign at best.

So while there is the chance that GBP/CAD can rally from here there also exists the strong possibility that consolidation, and even a potential failure lower, could transpire.

China Prompts Fresh Round of CAD Strength

The Canadian Dollar has hit a monthly high against the U.S. Dollar on news that Chinese bankers decided to cut the core interest rate whilst leaving room for monetary easing if required.

The Chinese rate decision has put positive pressure on most commodity bundles which drives CAD since it is a petro-growth currency.

In addition to this, we saw very robust Canadian Core and comprehensive Consumer Price Index data for October, with the Core component showing an increase of 0.3% against an expectation of 0.2%, and the comprehensive figure showing growth of 0.1% against a predicted retraction of 0.3%.

The Chinese central bank has cut interest rates and has pledged to also add credit liquidity to the financial system if necessary due to deepening slowdowns in their economy and increased default rates on loans.

"The rate cut is the first of its kind since July of 2012 and comes as a last resort following several other policy options including reducing the reserve requirement ratio for commercial banks, increases in short and medium term loans, guaranteed loans for residential development, and other short term liquidity operations," says a currency note from Olympia FX.

"The announcement has had a positive effect on equity markets worldwide as well as on commodity prices, and the Chinese Yuan is trading down against most of the other world currencies including the Canadian Dollar," say olympia.