Pound-to-Canadian Dollar Rate in the Week Ahead: Uptrend Fighting Channel Ceiling

Image © Adobe Stock

- GBP/CAD reaches resistance and pulls back

- Too early to say whether this is a reversal

- GBP and CAD eye inflation and retail sales data this week

Pound Sterling has been rising against the Canadian Dollar since the August lows were rejected, but has now touched the upper border of its  falling channel and reversed.

The pull-back came as a result of the Canadian Dollar strengthening from an improved economic outlook.

It is still too early to say for sure whether GBP/CAD has started a fresh move lower or is just in the throws of a pull-back before pushing higher again.

A break above the 1.7191 highs would confirm a continuation higher to the next target at 1.7250 and the 50-week moving average (MA), followed by 1.7380 at the level of the 200-day MA.

On the other hand a break below the 1.6920 September 12 lows would confirm two lower lows and two lower highs on the 4hr time frame and probably indicate a bearish change in the short-term trend and a probable extension lower as the channel continues extending to the downside.

Momentum is not particularly bullish, as measured by RSI, on any of the main time-frames, however, the short-term is still intact, we think, on balance, and given the old adage that the 'trend is your friend' we see more gains on the horizon as the most likely next development.

Advertisement
Lock in your Canadian Dollars: Get up to 5% more foreign exchange for international payments by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here

The Canadian Dollar: What to Watch

From a fundamental perspective the main release to watch in the week ahead is probably inflation data out on Friday at 13.30 B.S.T.

The consensus expectation is for the headline inflation rate to slow to 2.9% in August from 3.0% in July, and for it to show a -0.1% decline month-on-month.

Assuming inflation comes out in line with expectations or higher the Canadian Dollar (Loonie) is likely to remain supported. The relatively high inflation in Canada is making the Bank of Canada (BOC) raise interest rates and it is widely expected to have to raise them again in October.

Higher interest rates are positive for the Loonie as they tend to attract greater inflows of foreign capital drawn by the promise of higher returns.  

The other major release is retail sales, also out on Friday at the same time. This is expected to show a 0.4% month-on-month rise in July following the -0.2% registered in June, however, even a miss is not expected to hurt the Loonie too much so bullet-proofed is the next expected BOC rate hike.   

"As for retail sales, it’s been a more mixed picture, with sales slowing notably since late last year. However, another unimpressive figure for July is unlikely to be enough to deter the BoC from hiking again soon," says a note from brokers XM.com.

Indeed, data out in the previous week was mostly supportive of the economic outlook further cementing the likelihood of a BOC move at the October meeting and further gains for the Loonie.

"Statistics Canada also gave us an updated snapshot of Canadian household finances. The picture is pretty much what you’d expect. The closely watched measure of household debt to income rose to 169.1% (i.e. $1.69 owing for each dollar of disposable income). Reported on a non-seasonally adjusted basis, this ratio has risen in Q2 every year it has been published, but it is noteworthy that this year’s increase was the smallest since the year 2000," says Canadian-based investment bank TD Securities.

The other major driver of the Canadian Dollar is what is likely to be the outcome of the current NAFTA negotiations. Analysts appear more optimistic about the outcome in recent missives.

A bone of contention is dairy trade, however, judging from Canadian  compromises on dairy in other recent trade talks such as with Europe, a compromise with the US seems more than likely.

Although it doesn't clear up all the points of contention it paves the way for an endgame. The deadline for submitting a deal to Congress in the US is October 1.

"Finally, away from the data, there were mixed messages this week on the NAFTA front. Progress does appear to be continuing, but one clear point of contention is U.S. access to Canadian markets for dairy and other protected products. The good news is that there is recent precedent suggesting that Canada could yield some ground in this area, perhaps using it as a bargaining chip to achieve other goals. Both the TPP and CETA trade deals included at least some opening up of Canadian markets to foreign competition, indicating that there is scope for agreement as part of a broader deal," says TD Securities.

The Pound: What to Watch this Week

Sterling has made a decisive recovery in September as the terms of reference of the Brexit debate have undergone a dramatic change.

Whereas previously they were somewhat polarised into the Chequers proposal on the one hand and a 'no-deal' pure Brexit on the other the gap now appears to have closed.

Now even 'die hard' Brexit purists appear to be advocating a deal based on the EU's deal with Canada - known as a 'Canada plus' deal - whilst Chequers, and even continued membership of EEA is being considered as the soft option avoiding the most economic disruption.

We heard from analysts at Nordea Markets in the week past that the Pound should actually rise under all Brexit scenarios, but expect a bloodbath if a 'no deal' arises.

The bottom line for the Pound is should the probability of a 'no-deal' continue to diminish the currency should see more gains.

"Brexit talks between the UK and the EU are expected to be stepped up in the coming days with the topic likely to dominate the informal summit of EU leaders in Austria on September 20. Sterling should therefore continue to see high volatility as it remains sensitive to Brexit headlines," says a note from forex broker XM.com.

On the hard data front, meanwhile, there are also some notable releases in the week ahead including inflation figures for August and retail sales.

Headline inflation is forecast to dip back to 2.4% in August (from 2.5%) on a year-ago comparison basis, while the core rate is predicted to fall to 1.8% from 1.9% previously (year-on-year).

Analysts are overall a bit downbeat about the prospects of economic data in the week ahead so surprises to the upside would be likely to drive the Pound higher, whilst those to the downside might weigh but to a certain extent will already be accounted for.

"Next week’s indicators may not be as positive and could fail to provide support for the pound in case the Brexit negotiations were to break down," says XM.com, "CPI figures will be watched on Wednesday for evidence that inflationary pressures in the UK continue to edge lower towards the Bank of England’s 2% target."

The other hard data release is retail sales on Thursday which is forecast to show a 0.2% month-on-month contraction in sales in August after a 0.7% bounce in July.

The overall assessment for UK data is that it remains 'sluggish' and more at risk of decline than growth.

Regardless of data no-one expects the Bank of England (BOE) to raise rates until Brexit is clarified.

Since interest rates are the main driver of foreign exchange - pushing the Pound up if they are hiked - the currency is ultimately at the mercy of Brexit negotiations rather than data, since everything hinges on the terms of divorce.  

Put a different way, pure economic data is not the main consideration of when the BOE will next raise interest rates, and as such has less impact on the exchange rate. Indeed, this appears to have been the message from last week's September Bank of England policy decision.

"While inflation has started to come back down to earth and retail sales have firmed, economic growth in the U.K. has remained sluggish, with real GDP rising 1.5% annualised in Q2. Given slower economic growth and ongoing Brexit negotiations, we look for the Bank of England to remain on hold in coming quarters until these concerns subside," says a note from analysts at investment bank Wells Fargo.

Advertisement
Lock in your Canadian Dollars: Get up to 5% more foreign exchange for international payments by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here