GBP/CAD: Will 2.10 be Reached Again?

While the US dollar hits at 12 year best against the Canadian dollar the GBP to CAD conversion is struggling to deliver similar records.

The pound should be doing a great deal better against the Canadian dollar than it currently is. However, sterling has shown itself to be almost as sensitive to the Chinese-inspired market ructions as the commodity dollars are!

Consider just how weak the Canadian dollar is at present: USD/CAD raced to fresh 12 year highs mid-week as oil sank to 11 year lows.  

“The correlation between CAD and oil has been in excess of 90% these days and for good reasons because oil is Canada's number 1 export,” say Kathy Lien at BK Asset Management.

We warned earlier this week that oil prices have lower to go, therefore the Canadian dollar’s negative run could well extend.

While the dollar hits a 12 year best against the Canadian dollar, the same cannot be said for the British pound.

“Interestingly GBPCAD has been under pressure from key resistance at 2.10 through December but is now bouncing from support around 2.04. This should remain in current ranges,” say Lloyds Bank in a client briefing which touches on sterling’s recent performances against the Canadian dollar.

So while the US dollar races to a 12 year best, a poor December for sterling looks harder to shrug off.

Lloyds are concerned about sterling’s inability to find upside traction and are watching the GBP very closely at current levels as GBPUSD is testing an important support region around 1.45.

Even gains made against the euro at the start of the month have been erased ensuring EURGBP has rallied back from support around 0.7300 with key resistance here in the 0.7400/.7500 region.

Meanwhile, analysts at Intessa Sanpaolo have told clients they are downgrading their Canadian dollar forecasts in the near term.

In a note to clients the Italian bank announced a downside revision for the Canadian dollar in the short term.

On a 1m-3m horizon USD/CAD forecasts have been lowered from 1.35-1.34 to 1.43-1.36, on the back of the new drop in oil prices.

What’s Bothering the Pound?

There is a decided lack of enthusiasm for sterling as we walk into the new year. Granted, it is still at decent levels when compared to the past 8 years or so, but the uptrend has stalled.

Analysts roundly point to the upcoming EU referendum as a key fundamental reason to be wary of the currency in 2016.

The global outlook remains clouded too. On Thursday the 7th the UK’s finance minister - George Osborne - warned that the UK’s economic recovery is by no means guaranteed.

"Last year was the worst for global growth since the crash and this year opens with a dangerous cocktail of new threats. For Britain, the only antidote to that is confronting complacency and sticking to the course we’ve charted,” Osborne tells an audience in Cardiff.

Analysts have suggested the strong warning on the UK economy will be used to justify the continued path of constrained fiscal spending.

So while the Canadian dollar is certainly more exposed to global economic concerns, so too is the UK. For that reason we could see the GBP to CAD conversion struggle to make solid advances.

If the period of Canadian dollar weakness continues then a test of 2.10 should be possible.

But, this is by no means guaranteed as the Canadian unit is looking increasingly oversold and could well rebound.

Therefore what is needed is British pound strength - and we see few catalysts for such a scenario at this stage.