Market Forecast - Sterling Vs. Canadian Dollar 16/03/09
Sterling is still trading within a clearly defined trading range, with resistance in the low 1.80s doing its work again last week, and support stepping in just above 1.7500. We've marked these key levels on today's chart.
The problem facing the pound (one of the problems!) is the lack of investor appeal. With no yield to speak of among major currencies following the latest central bank rate cuts, it's more a question of which currency is less risky than the rest. The markets answered this question over recent weeks by bidding the US dollar higher as plunging stock markets caused traders and investors to de-risk and head for safer ground.
The Canadian dollar also benefited, and Sterling predictably declined due to the negative sentiment linked to the banking crisis, which in turn was behind the latest stock market falls. However, stocks staged a three day rebound into the end of last week, putting the dollar and CAD on the back foot, and allowing sterling to drift higher. If the equity market rebound continues we could see further weakness in USD/CAD, which will help the pound tread water and make further gains.
That is a big IF though, and while we are seeing a tradable low emerge in stocks, the lows were not typical of a "normal" bear market bottom, so we remain cautious on equities in the belief that the current rally is probably a bear market bounce, with new downside to come once this runs out of steam. If that scenario is correct, this bounce in GBP/CAD could also be short lived. It would take a close above 1.8400 to improve the technical outlook.
Market Forecast - Sterling Vs. Canadian Dollar 06/03/09
Bank of Canada cut interest rates to 0.5% on Monday, followed by an identical move from the Bank of England yesterday, leaving both territories with 0.5% rates that look like heading to zero soon. Sterling has been making cautious gains since January, breaking above trend resistance in the last few days, which could signal better things to come. However, before adopting a more optimistic tone we would like to see a close above 1.8500. A collection of technical barriers lie just ahead of this level from pervious failures to break above here in Jan'/Feb'.
Clients with CAD requirements should remain cautious and consider covering half of any exposure here while the market is trading close to recent highs.
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