GBP/CAD: Has the correction run its course?

The Canadian dollar has continued to push lower over the course of April, trading as low as 1.818 over the course of the month. This move has been driven by a combination of factors, namely a rebound in the price of oil, comments from BOC Governor Poloz that the surprise rate cut early this year was a “one and done” operation and the continuing US dollar strength.

One the flip side, sterling has been losing ground against all of the major currencies (except the Euro) due to concerns over the UK election and its likely impact on the UK economy. Back in 2010, we saw sterling fall as much as 8% in the aftermath of the election results.

Another hung parliament has the potential to see GBP fall once more due to the uncertainty that it will generate. Even a coalition being formed may not be enough to see GBP rally initially, as it is yet to be seen what the price of that support maybe. For example, the SNP are likely to demand another referendum on Scotland from Labour and UKIP will want an EU referendum to support the Tories.

Technically, we have seen GBPCAD find support at the 76.4% Fibonacci level of the move from 1.7767 to 1.9553. This was the last level of Fibonacci support, it is also approximately the top of the range we were trading within between Sept 14 and Jan 15.

For the short term, we have seen prices cross the 20 day moving average and the 5 day has made a bullish cross of both the 10 and 20 day moving average. This is a bullish signal and suggests that the recent downtrend is entering a new phase. Of course the million dollar question is, where do we head from here? From a technical perspective, we would usually expect to see the market trade to the upper Bollinger band (mauve lines) once the 20 day moving average has been broken. This would take us into the 1.869 region which is also the 38.2% Fibonacci level of the move from 1.9553 to 1.8156. As a rule of thumb we would expect the market to correct between 38.2% and 61.8% of the preceding move on any correction.

This gives us price targets of 1.869, 1.8854 and 1.9019. We still have a lot of work to do in order to achieve these levels especially given interim levels of resistance at 1.851 and 1.8649 which capped the market in 2014.

Buyers

Short term, we appear to be heading higher but with the UK election on the horizon this could easily be reversed. I would suggest a stop loss order below the recent lows i.e. in the 1.80 region just in case. If you have time on your side the 1.869, 1.8854 and 1.9019 make sensible targets.

Sellers:

We look to have bottomed out and are heading higher for the time being. Orders around the recent lows of 1.8156 seem a sensible target if you’re keen to take a chance on prices heading lower following the election result. If you’re nervous that the market is heading higher, then I would suggest making your move should the 10 day moving average make a bullish cross of the 20 day moving average as this will generate a strong buy signal.