Canadian Dollar Recovers Versus Pound After Bank of Canada Keep Policy Unchanged
GBP/CAD's down-trend resumed on Wednesday after the Bank of Canada left rates unchanged leading helping the Canadian Dollar to strengthen
The GBP/CAD pair resumed its down-trend on Wednesday after the Bank of Canada (BOC) decided to leave interest rates unchanged at 0.50% and said they say inflation expectations as roughly balanced.
Whilst analysts had not expected an interest rate cut, the BOC's policy statement indicated a steady inflation rate of 2.0% projected in 2016 and 2017, due to the rise in oil prices. This reduced the chances of another rate decrease.
Overall growth forecasts were clipped but the BOC were optimistic the economy would bounce back from the negative impact of the Alberta wildfires.
“In the near term, the Bank estimates that the hit from the Alberta wildfires will result in real gross domestic product (GDP) contracting by 1.0% at an annualized rate but that this will be followed by a sharp recovery in the third quarter of 2016 (3.5%).”
The BOC also acknowledged the support to growth provided by the government’s fiscal stimulus scheme.
According to RBC Capital Markets the BOC statement indicated a view that in the current situation conditions were "adequate":
"Today’s update signals that policymakers view current financial conditions as adequate to support growth for the medium term and by extension the achievement of the 2.0% inflation target.
Technical view
The pair has been rising since reaching the 1.6682 lows on the seventh of July.
Scotiabank’s FX Strategist, Shaun Osborne, holds a similar view, stating GBP/CAD could be making the beginnings of a reversal:
“GBPCAD is strengthening modestly. We noted late last week that minor GBP gains had the makings of a reversal (“morning star” - type rebound) but noted that net gains were small, suggesting a weak form of rebound at most.”
The mini-up-trend has already met our target at 1.7300.
It could still go higher, however, with a break above 1.7413 probably continuing up to the 1.7477 June 30 highs.
A break above 1.7500, could also open the way up to an extension of the up-trend to a target at 1.7575, which is just under the major 1.7593 June 29 highs.
The MACD has crossed above its signal line and is moving higher further supporting the possibility that the trend may be reversing and extending in a bullish direction.
Data out in the remainder of the week
The rest of the week ahead has the potential to be very volatile.
Not only are oil prices falling but both currencies have central bank meetings.
The Bank of Canada (BOC) meets on Wednesday for its interest rate decision.
A day later and the Bank of England (BOE) meets for its interest rate meeting.
In relation there is a 64% probability of a 25 basis point rate cut at the BOE meeting..
This would weaken sterling.
On the face of it there is a possibility that the pound could fall if there is a rate cut, however, the Canadian dollar may also be susceptible to weakness should the price of oil continue falling, or the BOC cut rates as suggetsed above by ING bank's Turner.
The Canadian dollar is highly correlated with the price of oil, showing a 78% average correlation over the last 10 years.
Crude has already fallen to $45 dollars a barrel from over $50 dollars a barrel, and this has helped stimulate the pair’s recent recovery.
A cursory look at the charts does not give any clarification of the expected future direction of the commodity.
