Canadian Dollar Dips Against Pound on Inflation Disappointment
The Pound rose against the Canadian Dollar ahead of the weekend after the release of disappointing inflation data suggested the Bank of Canada has little reason to start raising interest rates.
Recall the Canadian Dollar is one of the month's best-performing currencies owing to communication from the Bank of Canada that suggested it is now actually looking to start raising rates in the near-future.
The usual justification for raising interest rates is to stem rising inflation, and news that Canadian inflation has fallen to levels last seen in 1999 puts a lid on the view that Canadian rates need to go higher.
Currencies tend to rise as central banks raise interest rates, and fall when they cut interest rates as the yield on cash investments for global investors falls.
GBP/CAD rose from lows of 1.6730 to highs of 1.6920 during the day before giving back gains as traders took profit before the weekend and the pair dropped back down to 1.6870.
A lower-than-expected inflation rate of 1.3% in May dashed hopes stoked by the deputy governor of the BOC Carolyn A. Wilkins who gave a positive assessment of the economy and talked about the Bank raising interest rates at a speech last week.
Markets had been expecting an inflation reading of 1.50% and were pricing in the possibility of a July interest rate rise.
“Growth is coming in hot, but inflation is not. Inflation cooled further in May, the annual rate slipping by three ticks in reaching 1.3%.
Two of the Bank of Canada's three new preferred preferred measures of inflation also slipped modestly, cutting against recently more aggressive pricing for a rate hike as early as July,” said CIBC’s Nick Exarhos.
Rather than seeing best unwind of a July rate hike, however, they still appear to be pricing in a hike by October.
“We note that the dovish re-pricing at the front-end of the CAD OIS curve could still continue, given that markets are still more optimistic over the prospects of a 2017 rate hike than we are (after today's data a full rate hike is still priced in for the October meeting),” said ING’s Viraj Patel.
The continued market optimism at the possibility the BOC will increase interest rates reflects the chart of GBP/CAD, which despite the rally higher in Friday’s session is still technically in a bearish downtrend.
Indeed, looking at the daily chart the Friday’s strong up-day has not changed the fact that the pair continues to move in a sideways range after the very steep descent from the May highs.
This descent first looked like a typical three wave a-b-c correction.
However, when the exchange rate failed to rally after the completion of wave ‘c’, and then broke to new lows below the end of wave ‘c’ the trend technically changed from bullish to bearish.
Since then the pair has consolidated within a tight range between 1.67 and 1.69, on top of tough support from the 200-day moving average (MA).
Large moving averages can provide obstacles to more downside and the 200-day appears to be doing just that.
We would, therefore, want to see a clear break below the 200-day, signalled by a move below 1.6700 for confirmation of a breakdown to a target at 1.6600.
A further break below 1.6590 would then probably see the pair move down to the next target at 1.6500.
The MACD momentum indicator is well below its zero-line corroborating the downtrend.
