CAD drops with fall in price of oil but GBP also soft

Canadian Dollar Research Report

Sterling Canadian Dollar (GBPCAD) FX Technical Analysis

After a mild recovery in oil prices in March, once again we’re seeing a sell-off in commodities as we enter April. The Canadian dollar remains sensitive to oil prices making up the majority of its export market and as such the Canadian dollar could lose more ground as the oversupply of oil in the US continues - the situation could be made worse if sanctions on Iran are lifted creating a glut of oil, driving the price even lower. Some analysts are suggesting USD 20 a barrel for West Texas Intermediate before any kind of recovery.

In terms of key Canadian data, March GDP actually beat expectations coming in at -0.1% for the month against -0.2% consensus. Nonetheless the Canadian economy remains in contraction and the slight bounce in CAD on release of the data hasn’t followed through.

The problem for the pound is that it’s struggling to make any headway against a weak Canadian dollar. Firstly the pound’s lost ground itself - there’s been a more dovish tone out of the Bank of England, as UK inflation fell to 0% for the first time and it’s likely the economy will suffer deflation this year - interest rates are unlikely to increase now until the second half of 2016. Secondly we’re still in a strong USD environment - strong US data backed and the chance of the first interest rate increase from the US as early as July. Consequently GBPUSD remains under pressure and that’s keeping GBPCAD pegged lower.

After the strong rally in Feb that saw GBPCAD hit the multi-year high at 1.9553 a deeper pullback has seen the currency pair fall back to 1.85 (coinciding with a 50% Fibonacci correction from the November low @ 1.7551 up to the February high). It’s received to 1.9800 but hasn’t yet managed to close above the 20 day moving average which may well now act as resistance. If the US economic data continues to outperform, GBPUSD will trade lower dragging GBPCAD down with it. As such there’s the potential for another retest of the 1.85 recent low, potentially onto 1.8311 and 1.8017. This Good Friday’s US unemployment and non-farm payrolls data will be critical in deciding the direction of GBPUSD and consequently GBPCAD in the coming weeks.

Buyers

If GBPCAD can close the week above 1.89 that could open up 1.9080 but at the moment is does look pretty bearish. It will be worth putting a safety net in place (stop loss order) under 1.8500 just in case the prices are set to fall further. On the topside target 1.88 initially.

Sellers

Potential for another 1.8550 test, onto 1.8311 so place orders accordingly - as above though you’ll want to have a safety net above the current prices just in case we get a strong close on GBPCAD this week - so stop loss order at 1.9000 would be sensible.