Market Forecast - Sterling Vs. Canadian Dollar 24/11/09
We've had a very mixed bag of data for the pound over the last week. Public sector borrowing was far higher than expected for October (£11bn versus £7bn expected) and traders are still concerned that further quantitative easing may lie ahead after last week's Bank of England minutes revealed that one MPC member voted for a £40bn increase. On the plus side, inflation for October was a healthy 1.5%, and we are expecting a slight upward revision to the preliminary estimate of third quarter GDP tomorrow.
In Canada things were quieter, with annualised October inflation ticking into positive territory at 0.1%. Finance minister Jim Flaherty reiterated his intention to continue the stimulus spending package into 2010, but said there would be no new large spending items in the budget. Canada slumped into a budget deficit for 2008-09, but is unique among the G7 in being the only country to have maintained a budget surplus for the ten preceding years.
The short squeeze that helped sterling surge in October has failed to follow through into November. The pound has still managed to defend our key near term support at 1.7110, and while it continues to do so we are giving it the benefit of the doubt. It would take a fresh break above 1.7940 to signal a new up leg, and a further rally up through 1.8300 would ask serious questions of the longer term down trend. Let's not get ahead of ourselves ! For now we recommend that clients with near term CAD requirements cover half now and take a "wait and see" approach on the balance. Keep in mind that a break below 1.7110 would in our view signal a likely deterioration back towards the October lows around 1.6250.
Canadian Dollar Update and Future Forecast 11th November 2009
In our last update we were trading around 1.6850, and feeling decidedly more buoyant given that sterling has bought itself a reprieve by recapturing the January '09 lows at 1.6750.
"A short squeeze happens when speculators who have sold the pound in expectation of further declines are forced to re-buy the currency to close their bets and stem losses. This situation can develop with little warning when large numbers of traders are caught "offside" when a market turns unexpectedly." - Last update
The short squeeze continued into the end of October, and the new month has seen us trade in a corrective range between 1.75 - 1.80.
Last week's Bank of England meeting was widely expected to result in a further increase to QE, but traders were relieved that the bank extended the bond purchasing programme by just £25bn, and not the £50bn that some expected. Sterling duly rallied, breaking new high ground against the Euro and US dollar this week, but found it harder going against the commodity currencies which are still enjoying the tailwind of record gold prices, and oil bumping along close to 12 month highs.
The Canadian dollar is benefitting from a continued flow out of its US counterpart. While yields between the two are flat, the exodus from USD is helping gold, which in turn is supporting CAD. The US currency plunged on Monday following comments from the G20 over the weekend, indicating that interest rates would need to remain low for some time yet. A weak US dollar dents Canadian exports, leading Bank of Canada governor Mark Carney to vocalise his desire for currency stability. Intervention by BoC is almost certainly not an option however, as the US dollar down trend is broad based. Competitive devaluation will continue to be governed by monetary and fiscal stimuli rather than direct participation in the markets.
The technical outlook remains positive as long as we continue to trade close to recent highs. While there can be no guarantee that sterling is out of the woods yet, the extreme levels of pessimism reached last month could signal a major low. That pessimism was characterised by a sense of general resignation that the pound was heading for parity against the euro! That is still possible, but in the short term we would like the pound to defend 1.7500 and certainly 1.7110 in order to maintain the initiative.
Last week
Sterling maintained a stable level against the Canadian dollar, with a trading range of $1.75000 to $1.78000.
Data within the UK last week had no real impact, with the main focus on how much the Bank of England would expand its the existing quantative easing program. Last Thursday industrial production provided good numbers which was a surprise to many for September's with a figure that came in at 1.6% month on month, versus the previous month's -2.5%, and above the 1.2% expectation. Many seen this a positive but really its only a technical correction, due to the fact that factories were closed for summer break and hence, falls short of suggesting a recovery across the industrial sector.
The Chartered Institute of Purchasing & Supply (CIPS) services Purchasing Managers' Index (PMI) also bucked the trend, with a reading of 56.9 (versus the previous 55.3) "this is the highest level reported since August 2007. Though construction PMI showed a small drop, the manufacturing number posted an impressive rise to a two-year high at 53.7. Add to this the latest rise in the Halifax house price index and it is no surprise that the market started to scale down its previous expectations of a £50bn addition to the Bank of England Quantative Easing program.
The Bank of England keep UK interest rates on hold at 0.5%. The main focus of Thursday meeting was the extension of quantative easing where the Bank of England took the decision to raise the current plan by £25bn taking the total amount to £200bn, the extension would take three months to complete. Sterling gathered pace straight after the announcement, this could be because they were expecting more or even is the end to further easing.
Following the previous week's disappointing release confirming that the Canadian economy shrank by 0.1% for August there are still doubts as to whether the country climbed out of recession in the third quarter.
Canada's building permits rose 1.6% in September, the fourth gain in five months.
Residential permits jumped by 9.4%, signaling that Canada's construction industry is now back on the front foot for demand.
The closely watched Ivey Purchasing Managers' Index was down to 61.2 from 61.7, but not of any significance to impact on the Canadian Dollar.
Canadian unemployment data.
43,200 job losses were recorded in October, with the unemployment rate rising to 8.6% from September's figure of 8.4%.
Housing start-out is due out at the beginning of the week, but all eyes are on Friday for trade balance number to see if any improvement to the past months trade deficit. Canada had enjoyed a three-decade run of trade surpluses until last December, when slumping sales to the US and the strengthening Canadian dollar contributed to the deteriorating trade picture.
UK data this week is very short with only the long awaited Bank of England quarterly inflation report.
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