Pound-to-Canadian Dollar Rate Week Ahead: Staying Bullish Despite Recent Decline

- GBP/CAD seen supported on dips

- Key risk event is Bank of Canada meeting mid-week

- Pound to be bucked by threesome of key economic data releases this week

The British Pound has been in decline against the Canadian Dollar since mid-March when a top of 1.8415 was hit and a wave of Canadian Dollar buying sent GBP/CAD back lower.

The exchange rate will start the new week from 1.7946 having appeared to have settled just north of ~1.7830; the buying interest in Sterling witnessed in this region could allow GBP/CAD to put in a base and draw a line under the recent bout of weakness.

Indeed, we note Sterling has made a 6% advance on the Canadian Dollar in 2018, which suggests the UK currency does enjoy solid momentum, and the recent setback might be temporary.

"GBP/CAD’s weekly chart remains compelling from the bullish point of view," says Shaun Osborne, a foreign exchange strategist with Scotiabank in Toronto. "A look at the longer run state of play here highlights the longer–term double bottom that has been triggered by the GBP’s recent gains through 1.7850."

Osborne targets 1.99 "over the next 12 months or so".

"Note that, so far, the neckline trigger at 1.7850 is doing its secondary job of supporting the GBP on dips. Given the longer term nature of the formation, we will allow for some weakness in the GBP back under 1.7850 in the next few weeks, providing that losses remain relatively shallow," adds the analyst.

An important point to note from Osborne is the observation that the Canadian Dollar is starting to track the movement of commodity prices more closely, so the oil price might be something that matters over coming days and weeks.

"Our correlation matrix highlights the evolving and strengthening relationship between CAD and crude/commodity prices recently. Since the start of April, the CAD’s correlation with 2Y US-Canada spreads has slipped from +78% to +55% while the correlation between the CAD/WTI has strengthened from +40% to +55%," says Osborne.

So it could be a case of watching oil markets over coming days.

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The Canadian Calendar: BoC and Inflation

Above: Bank of Canada Governor Poloz © Bank of Canada

The Canadian Dollar will be eyeing a number of key fundamental events on the calendar in the coming week with the Bank of Canada monetary policy report and interest rate decision being the prime event.

The central bank will be in focus at 15:00 B.S.T. on Wednesday, April 18 as it guides markets on potential future monetary policy moves.

The key question is how far away is the next interest rate rise? If the BoC hints that it is getting closer, expect CAD to rally, if further out, expect CAD to fall.

Economist Avery Shenfeld with CIBC says the BoC is likely to guide markets to a rate rise in July as they maintain a degree of caution in light of the sealing of a new NAFTA deal between Canada, the US and Mexico, something that is yet to be finalised.

"A new NAFTA will be less supportive for corporate Canada than the old one, mainly given the negative impact of the recent tax changes in the US on our competitiveness," says Shenfeld.

Then there is the question of Canadian economic data to consider. While corporate Canada is noted to be performing in a robust fashion, headline economic numbers have disappointed of late.

"GDP declined in January and the labour market lost 40K jobs in the first quarter. The pipeline saga is big enough to have macroeconomic implications," notes Shenfeld. "So we’ll stick to our call and wait eagerly to read between the lines of the Bank’s statement next week."

"We think the BoC may sound a little more positive about the outlook following the constructive BOS report last week and the fact that a NAFTA deal looks more likely now than just a few weeks ago. A modestly constructive lilt to the press conference (which solidifies already strong expectations of a tightening around mid-year) along with upside surprises for retail sales and/or CPI Friday are the biggest positive risks for the CAD," says Scotiabank's Osborne.

The next key event on the calendar is the release of Canadian inflation for March and retail sales for February.

March inflation is forecast to read at 0.4% on a month-on-month basis and 2.4% on an annualised basis.  Core inflation is forecast at 1.5% on an annualised basis. If these figures are bested, then expect the Canadian Dollar to rise. The opposite is likely on a weaker-than-expected number.

Retail sales are meanwhile forecast to have grown 0.5% in February.

The Pound's Week Ahead

A big week in terms of data for the UK in the coming week with labour market, inflation and retail sales numbers all on tap.

The Pound has enjoyed a strong start to 2018 as concerns and uncertainties relating to Brexit fade. As a result, analyst Viraj Patel at ING Bank N.V. believes Sterling will now start to pay more attention to data. "It appears that we’re back to good old-fashioned UK data watching to determine the short-term direction for the currency," says the analyst. "The week ahead shouldn’t disappoint here given the array of key data releases to watch out for."

On Tuesday, April 17 we have labour market data with markets looking for employment to increase by 13.3K in the quarter to March.

The Unemployment rate is forecast to stick at 4.3%.

Most important for the Pound will be wage data; as it is wage data that the Bank of England will be watching when it comes to raising intent rates with the rule of thumb being that higher wages should prompt interest rate wages which are in turn supportive of Sterling.

The average earnings index, with bonuses, is forecast to have risen 3% in February. If this number is missed, expect the Pound to struggle.

"We think signs of firming wage growth next week may seal the deal for a May BoE rate hike," says Patel.

Inflation data on Wednesday, April 18 will also be key with economists forecasting the headline CPI rate to be at 2.7%, unchanged from the previous month.

Calling Sterling's reaction to this is tricky as the traditional rule of thumb is higher inflation = a positive reaction in the Pound as it should mean the Bank of England will need to deliver more interest rates. This should still be true.

However, falling inflation also means the squeeze on consumers is fading as pay growth starts to finally creep ahead of inflation - and this is good for the economy. And what is good for the economy is good for the Pound.

The inflation data could therefore offer a win-win for Sterling.

Finally, markets will be watching retail sales on Thursday, April 19 with economists forecasting a reading of -0.5% thanks to the inclement weather seen in March.

"Retail sales figures (Thursday) should reveal that the heavy snowfall in March hit the sector hard, with sales volumes contracting sharply on the month says Liam Peach, an economist with Capital Economics.

We therefore reckon markets are likely to discount seasonality into this month's data and instead look for next month's data for direction.

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