GBP/CAD Trades to Highest levels since 2009

Canadian Dollar Research Report

GBP/CAD Trades to Highest levels since 2009

Sterling Canadian Dollar (GBPCAD) FX Technical Analysis

Well the rally continues, having struggled for over a year to break above 1.8643 we finally managed it late last month following the decline in oil and the surprise interest rate cut from the Bank of Canada. As a rule of thumb, we would expect the market to trade the height of the preceding trading range when we see a break out. We spent 2014 trading within a range between 1.754 and 1.864 so would expect the market to trade 11 cents from the break out point in the direction of that break out. This is a very rough rule of thumb but it would suggest we should see a move to 1.975 or so in the coming weeks.

The Canadian dollar has been on the back foot as the price of oil has slipped below US$50 per barrel as the cost of production for a lot of Canadian oil producers is above this level meaning it is unprofitable to continue production at these levels. With Saudi Arabia’s cost of production running at approximately US$2 per barrel, many have speculated that the recent price falls have been engineered by the Saudi’s refusing to cut production in order to drive the price lower and steal market share from other producers.

When this is coupled with the fall in metal prices, it is not surprising that the Canadian economy is facing some severe head winds. The Bank of Canada’s rate cut was seen a pre-emptive measure last month to try and stimulate other areas of the economy to pick up the slack from the commodity sector. Just ask the Reserve Bank of Australia how difficult that can be, as they have recently cut rates once more for a similar reason. Retail sales in Canada slipped 2% in December 2014 which is the largest decline since April 2010. With these figures in mind the market expects another 0.25% rate cut from the BOC in the coming months which should keep the CAD on the back foot.

One caveat to a further sell off is the US dollar. We often see GBPUSD acting as a handbrake on GBPCAD, so if we see the downtrend in GBP/USD continue this could limit further gains in GBPUSD.

Technically, we have finally seen the market break above the 2009 high and 50% Fibonacci level of 1.9331 over the course of this week. We need to see the market close the week above this level in order to confirm the break. As long as the break is confirmed, further gains look likely in the short term. The next level of resistance will be the psychologically important level of 2.00 and then 2.0719 (which represents the best rate we have seen since December 2007). One note of caution however, is there is some bearish divergence on the daily charts. Bearish divergence occurs when momentum is failing to confirm the move, in this case momentum is pointing lower whilst the prices trade to fresh highs.

Bearish divergence is an early warning indicator that a move should not be trusted and that a correction/reversal is likely. Unfortunately, it does not give us an indication as to when this will occur just that it is likely.

Buyers

In the short term, due to bearish divergence mentioned above, I would be tempted to place a stop loss order beneath the 1.9331 in case this move turns out to be a false break. I would look to combine this with a limit order between current levels and 2.00.

Sellers

Unfortunately, the overall trend is still against you and this is showing little sign of changing in the short term. With this in mind, I would be tempted to convert a portion of your funds around 1.933 should it be tested once more and again in the 1.90 region should support at 1.933 fail. A stop loss just above 2.00 also seems sensible as a break of this level would suggest a move to 2.07 is likely to follow relatively quickly.