Pound Sterling Forecast to Breach 2.0 vs Canadian Dollar in 2015
New predictions issued by a leading Canadian investment bank confirm a multi-year uptrend in GBP/CAD is set to resume.
The pound sterling (GBP) saw strong gains through the duration of 2013 as the post-financial crisis slump in GBP/CAD came to an end.
However, the recovery back towards historical norms stalled in 2014 when fresh Canadian dollar (CAD) strength forced the currency pair into a sideways trend.
The start of 2015 brings with it a surprise Bank of Canada (BoC) rate cut and we see the longer-term recovery is back on track.
Indeed, one currency analyst is forecasting a return to levels above 2.0 by the close of 2015.
TD Securities: Rally Poised to Resume
After an extended consolidation, GBPCAD’s rally from historically-depressed levels looks set to resume say TD Securities in a ‘Market Musings’ note to clients issued on 27th January.
A double-whammy of fundamental and technical considerations will support the medium-term bull case for the cross.
Shaun Osborne, Chief FX Strategist at TD Securities tells us:
“The broader bull trend in the cross is poised to get back on track. We have considered GBPCAD to be still relatively cheap at sub-2.00 levels in the past few years considering the relatively stable (pre-crisis) range for the cross was well above 2.00 and, since the 1970s, weakness below the 2.00 area was usually a relatively short-lived experience.”
Driver One: Fundamentals
Both the US Fed and the Bank of England are getting closer to normalisation - i.e higher interest rates - as economies improve.
At the same time, other central banks—such as the BoC—are having to respond to sluggish domestic growth signals via more policy accommodation.
“The relative improvement in the UK economy versus Canada has helped lift GBPCAD off the floor since 2013 and we think there is a bit more strength to come at least in the next few quarters,” notes Osborne.
More supportive nominal UK-Canada rate spreads have helped underpin the GBPCAD recovery and TD Securities forecasts for short-term bond yields implies more upside scope for the cross in 2015:
Driver Two: Technicals
In addition to a stronger fundamental basis for a climbing GBP/CAD the charts are also advocating for further gains.
According to Osborne:
“After a prolonged period of sideways range-trading, which effectively formed a bullish wedge (continuation) signal on the longer-term chart, GBPCAD gains are providing renewed upside momentum to the trade.”
“Over the next 3-6 months, a rally to 2.02 (50% Fibonacci retracement of the 2007/2010 sell-off in the cross) looks achievable. We’ll take a stab at a long here (1.8839), risking 1.8630 for an initial push up to 2.00/02. If stopped, we’ll look to get long again nearer 1.8350, a retest of the bull break out point,” says Osborne.
