Market Forecast - Sterling Vs. Canadian Dollar 26/01/09
New banking sector nasties were behind the big sterling sell off last week after the government announced a new bailout plan that will see billions of tax payer money used to buy up "toxic" assets in an attempt to alleviate the credit crunch. Another nail in the coffin for the pound was the release of fourth quarter GDP figures which showed contraction of 1.5%, and confirmed that the UK is now officially in recession (as if we did not know it already!).
Meanwhile, the Canadian dollar continues to strengthen, partly driven by US dollar strength which reflects a move into lower risk investments. Bank of Canada cut interest rates by 0.5% to 1% on January 20th, but markets are now being driven not by interest rate differentials, but by other factors such as risk avoidance. The Loonie has also been underpinned during recent days by a 20% surge in oil prices.
The technical outlook remains dire for sterling. We are now trading well below the 1993 lows, which means there is little in the way of historical price levels to reference going forward.
Market Forecast - Sterling Vs. Canadian Dollar 07/01/09
Nervousness over further interest rate cuts is still haunting the pound, while gains for crude oil have supported the Canadian currency over the last few days, leading to new multi decade lows for the GBP/CAD exchange rate. The focus for this week will fall on the Bank of England meeting on Thursday, which is expected to result in another cut, probably of 0.5%. There is some uncertainty however following large cuts in Nov/Dec, and recent comments from the banks indicating that lending rates would not respond to further cuts in the base rate. However, weak housing and manufacturing data means the Bank of England will be under pressure to be seen to take whatever action they can.
Meanwhile, Bank of Canada's next meeting is January 20th, and interest rates there are currently 1.5%, considerably higher than in the US, giving some room for further easing.
The technical outlook is poor, and we could be looking at further downside in the short term. After dipping below 1.7200 yesterday we recovered to close positive on the day, but from a technical perspective it would take a close above 1.8085 for us to become more positive on the outlook. Clients with CAD requirements should consider covering them now to avoid further downside, or for those hoping for a bounce, placing a stop order is one way of minimising your risk. Speak to your account manager for more information on stop orders.
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