Canadian Dollar Forecast vs the Pound: GBP-CAD Could Rally to 2.0

Strategists at TD Securities in Toronto are forecasting the Canadian dollar will likely have the advantage against the USD in coming months.

However, the pound sterling could be about to exert fresh dominance after a recent poor run.

A weaker USD-CAD is largely seen to be a driven by the US dollar side of the story with softening data and a static Federal Reserve scuppering the powerful move higher in USD.

The exchange rate has fallen from a March high of 1.28 down to support at 1.20 confirming momentum has swung back to favour the Canadian dollar.

The Canadian currency meanwhile continues to be favoured over the pound sterling which has been dragged down from a 2015 best of 1.9557 to April lows of 1.8141.

That said, we see the GBP-CAD forming a base formation at present, this is a technical event that could protect the British pound over coming weeks. We explore this further below.

Nevertheless, those using sterling to buy Canadian dollars should keep an eye on the USD-CAD as moves here could well influence Canadian dollar strength elsewhere.

If forecasts pricing in a stronger CAD until the second half of 2015 are correct then the GBP could well struggle to gain traction at best, at worst further declines could occur.

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USD-CAD Rallies Will Ultimately Fail in the Near-Term

With the broader trend up in the USD showing evident signs of weakening this week analyst Shaun Osborne at TD Securities is yet to be convinced that the downside potential in USDCAD has been fully realized at this point.

We do note however that the dollar appears intent to defend the floor located at 1.20, this support region could well stem further weakness.

From a tactical perspective Osborne suggests:  

“USD gains are liable to extend above 1.21 but we would favour re-establishing tactical short USDCAD positions again in the event of a bounce in funds to the 1.2300/50 range in the next couple of weeks, ahead of what we still expect to be a more constructive story for the USD in the latter part of the year.”

TD Securities believe that the US dollar will start strengthening from mid-year onwards and would be more comfortable building long USDCAD positions beyond the middle of the year.

The analyst believes the second half of 2015 will be more constructive for USDCAD because either:

1) the US economy recovers from the soft Q1 and the Fed tightening commences in September (still our base case), underpinning the USD or

2) the US economy fails to recover, in contrast to Governor Poloz’s expectations, and markets start to wonder if more “insurance” will be needed in Canada.

Outlook for the GBP-CAD

Taking a more detailed look at the sterling-CAD, TD's Shaun Osborne is convinced by the ability of 1.83 to support the UK currency:

"GBPCAD has traded with a soft bias over the past few days, dumping the cross back to major support around the 1.83 point—this is bull break out point from the year-long consolidation in the cross that followed the sharp rally in 2013 and now constitutes strong, medium-term support.

"The initial rebound from the 1.83 retest stalled at the 40-day MA last month and  short-term dynamics remain adverse.

"We still rather believe in the merits of the bull story here and we can allow for a brief infraction of support and still consider the bull break out active (we target a move towards 2.00/02 in the coming months)."