Canadian Dollar Outperforms after Optimistic Central Bank Statement

The Canadian Dollar has strengthened and relative performance data shows that only NOK, SEC and NZD are outperforming which suggests that the broader commodity-linked currency complex is doing well.

Indeed, recent oil price outperformance can also help explain some of the CAD and NOK performance.

But more relevant to the Canadian scenario was the boost afforded to the currency following the release of an optimistic Bank of Canada (BOC) rate meeting statement.

The GBP/CAD exchange rate is quoted at 1.7407 at the time of writing, down 0.6% on the day.

Although the Bank kept interest rates unchanged at 0.5% the statement was broadly viewed by commentators as more positive about the economy.

The no-change decision was widely expected.

“But the tone of the statement was much less dovish than anticipated. Indeed the Bank chose to put the emphasis on the improving global economy and the fact that Canada’s adjustment to the oil shock is largely complete,” says Paul-André Pinsonnault at NBF Economics and Strategy.

Gone was the reference to “material” excess capacity in the economy ─ that was replaced by the phrase “ongoing excess capacity”.

“The latter explains the decision to stand pat for now, but the changing language sets the stage for a move from a neutral stance to a tightening bias before year end,” says Pinsonnault.

Part of the thrust of the message appeared to be that economy was finally gaining traction after successfully adapting to lower oil prices.

The comments about growth broadening out across the whole country rather than just being concentrated in points of affluence was also reiterated.

The May report was more positive about employment than the April one.

“Consumer spending and the housing sector continue to be robust on the back of an improving labour market, and these are becoming more broadly based across regions,” said the BOC.

The combination of lower inflation due to fierce competition and economic growth is the most advantageous blend for the BOC.

Outlook Negative for GBP/CAD

From a technical and chart perspective, the GBP/CAD pair is extending its ‘rounding top’ pattern, which we have discussed in previous articles on the pair and was first identified by Scotiabank’s strategist Shaun Osborne.

This is the rounding nature of the price action as it rolled over the 1.7800 highs, however, we also see the possibility that this may also just be a correction too – it is simply too early to say.

If it is still just a correction then the pair may well resume soon and start to push higher again.

In his latest analysis of the pair, Scotia’s Shaun Osborne is still bearish seeing a move down to 1.71/2 as on the cards.

“The broader “roll over” in the cross from the early May high remains intact and likely has further room to run, we think. The sell-off has been a “slow burn” affair so far but the stall in the broader rally is apparent on the daily chart, via the ’rounded top’ nature of the decline so far, and the weekly chart, where a third weekly ’doji’ candle last week supports the impression that the longer run impetus behind GBP gains is fading. We think GBP gains are a sell and look for the correction lower to extend towards 1.71/1.72,” said the Scotia analyst.

We concur, seeing a break below 1.7400 as providing the confirmation for a continuation down to 1.7200 where the 50-day MA is situated and likely to hold up further losses.

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