Pound Breaks Above Key 200-day Moving Average Against Canadian Dollar
The Pound to Canadian Dollar exchange rate has broken above the 200-day moving average signalling a possible reversal of the long-term bearish trend assuming it can hold onto the break in the coming days.
The break came after continued high US inventory data spelled more bad news for oil, Canada’s largest export, weighing on the outlook for the balance of payments and therefore demand for the Canadian Dollar.
“Crude prices fell overnight, as markets considered the outlook for oil production,” says a note by St George Economics.
However the commodity later staged a rebound in the morning (Tuesday) after OPEC said it was considering extending its agreement to cap supply in order to support prices.
On Tuesday, march 28 Iran had joined the ranks of Oman and Kuwait in suggesting a six-month extension to the OPEC production cap agreement.
This adds further weight to the proposal and further supporting oil prices.
OPEC ministers will meet on May 25 in Vienna to decide whether to extend the deal.
West Texas Crude had risen to 48.16, up 0.90% at the time of writing on Tuesday.
The Canadian Dollar is highly correlated to oil, so any further strengthening in the commodity on OPEC news could start to stall the current bull rally in GBP/CAD.
Poloz Ahead
Tuesday could be a key day for CAD as the head of the Bank of Canada, Stephen Poloz is also scheduled to give a speech in which he might comment on the current economic situation and central bank policy.
Analysts had placed Poloz’s stance as dovish – which means wanting lower interest rates – but a spate of positive data releases in 2017, including a massive leap in Retail Sales has increased the chances of a shift in stance to a more neutral position, which would be positive for CAD (and negative for GBP/CAD).
Naysayers at TD Securities however have put forward the theory that after Trump’s failure to repeal the affordable care act he may concentrate on autonomous policy actions he can take as President alone such as those pertaining to trade instead of those which require the agreement of Congress.
“A US pivot away from health care and back to fiscal and trade policy could increase the risk premium on CAD; this reflects discussions around BATs and other import taxes and the prospects of renegotiating NAFTA,” say TD Securities in a client brief.
Such a ‘pivot’ would be negative for the Canadian Dollar.
Where Could GBP/CAD Go Next?
From a technical perspective analysts are constructive about the future of GBPCAD after the, "rally seen over the past week broke through some significant points—the 1.6620 level that we thought had to be taken out to extend gains and the 200-day MA (the first time the GBP has been above this benchmark in more than a year),” remarks Scotiabank’s Shaun Osborne in a note seen by Pound Sterling Live.
“The bearish signal flashed by the daily Bollinger bands last week patently did not work but the warning that a more violent move in the market was liable to emerge was prescient. Short-term trend signals are bullish while longer term studies remain flat. We think sterling can extend somewhat further in the near-term but we are still somewhat cautious on the longer run trend,” adds Osborne.
We see a possibility of a continuation higher to a target at 1.72 where the leg up from the October lows (X) will be equal in length to the current move from the recent breakout (Y), thus conforming to a common principle of 'equality' in financial markets.
