Canadian Dollar Relief Against Pound and Dollar Won't Last Long

Last Updated: 14 August

The outlook for the pound to Canadian dollar exchange rate (GBPCAD) rests on the support zone at 2.0200 while USD/CAD is forecast to hit 1.40 by Morgan Stanley.

The pound sterling has been in retreat against the Canadian dollar since early August with the 2015 uptrend apparently stalling.

Consolidation is the preferred stance with a range being defined by 2.0200 at the bottom and 2.0400 at the top.

A break of 2.0400 will likely encourage buying interest and result in a test of the 2015 best above 2.0500.

However, for us the support zone at 2.0200 is the more interesting area as we remain bullish on the pound to Canadian dollar exchange rate above this point. That said, the global fundamental picture remains fluid with central bank intervention in China proving uncertainty.

For now the market has calmed which allows us to build up a technical forecast based on the mentioned levels.

USD/CAD Aims for 1.40

The latest strategic note from the technical analysis team at Morgan Stanley meanwhile confirm a longer-term bias in favour of USD/CAD.

Morgan Stanley's Sheena Shah says:

"The longer-term picture for USDCAD is bullish, and we recommend buying on any dips. Currently in a C-wave, the structure has exceeded the previous A-wave top at 1.3065. The current C-wave is incomplete since we believe it is still in a 3rd wave. Our longer-term bullish analysis would be incorrect on a dip toward the low at 1.19.

"USDCAD has large upside momentum as it is within a 3rd wave of a larger 3rd wave. We target 1.40 in our strategic recommendations."

Canadian Investment Spending Dries Up

The fundamental outlook for the Canadian economy, and thus the currency, remains challening. Latest data confirms business investment spending is drying up.

Trade data shows real imports of both industrial machinery and electronic equipment fell in Q2 at the fastest pace since the 2008/09 recession.

The bad news doesn’t end there argue NBG Economics and Research who say a further contraction in investment is highly likely in the second half of 2015.

This confirms the economic picture in Canada remains soft at best and the prospect of further CAD-negative interest rate cuts are alive.

“Even low interest rates may not be enough to entice firms to increase investment outlays especially when profits are declining and the growth outlook is weakening due to persistence of depressed oil prices. The investment decline won’t be isolated to the energy sector,” say NBF Economics and Research.

And, thanks to the sinking Canadian dollar, it’s now more expensive for everybody to import capital goods.

NBF say their studies indicate plenty of downside potential for investment spending from here.

“If we’re correct about the extent of the investment slump, that would equate not only to weak growth this year, but also to lower potential GDP growth for 2016 and beyond,” warn NBF.

It is on observations like this that we are backing the GBP/CAD exchange rate to continue advancing.

The pound is up 11% against the Canadian dollar year to date and Goldman Sachs are forecasting the British pound complex to advance a further 12%.

We would expect much of the gains in the basket to come against the likes of the Canadian dollar.

Morgan Stanley have confirmed to clients that within developed markets, the pressure remains against commodity currencies, with CAD looking most vulnerable as oil sector investment cuts loom.

NOK is not far behind despite Norway’s government moving into fiscal expansion, funded by asset liquidation of its generation funds.

In contrast, Morgan Stanley say SEK has good prospects to rally as the Riksbank sees July inflation beating expectations and Sweden’s manufacturing sector resists the global downtrend