Market Forecast - Sterling Vs. Canadian Dollar 19/10/09
Sterling enjoyed a strong rally into the end of last week after bullish comments from Bank of England policy maker Paul Fisher noting that quantitative easing is working well. The scene was already set for some sort of rebound after better than expected UK jobless figures, but the Fisher comments sparked a full blown "short squeeze" on Thursday morning. 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. The commodity currencies are fighting back this morning against a backdrop of higher oil prices, in particular the Australian and New Zealand dollars; but the Canadian dollar's reaction has been more muted this morning.
There is still some debate over whether the Bank of England may extend so called "QE" at the November meeting, but traders will be focussing on Wednesday's release of the October meeting minutes to get a real view of how that debate is looking inside the nine member Monetary Policy Committee.
Options traders have been increasing bets that the Canadian dollar will reach parity against its US counterpart this year. Buoyed by strong commodities CAD has already rallied 25% against the dollar since March, and looks set to continue that trend. So while sterling is having some success in rising against the US dollar this year, CAD will be a tougher nut to crack.
The technical outlook is mixed, but sterling has bought itself at least a temporary reprieve after recapturing the old lows around 1.6750. We would be concerned if the pound dips below 1.6500 again. Buyers of CAD who still have time on their side should consider covering half of any requirement now while the rate is trading well off the recent lows. Meanwhile, we would take a "wait and see" on the balance, or place a stop order below 1.65 (based on the interbank rate. The rate you receive will depend on the volume of currency you are trading).
Market Forecast - Sterling Vs. Canadian Dollar 07/10/09
Sterling fell again yesterday after an unexpected decline in manufacturing during August. Output fell 1.9%, the steepest decline since January. Analysts had been expecting a small rise.
In other news, the Reserve Bank of Australia raised interest rates yesterday in a surprise move. A quarter point hike puts the overnight rate at 3.25%, up from 3.0%. Analysts had widely expected no change, although there was an underlying impression that the RBA statement would include reference to possible future rate hikes.
Sentiment towards the pound improved marginally last week as traders started to look forward to this month's Bank of England meeting this Thursday, with the all important quantitative easing package expected to remain on hold at £175bn; but that sentiment is overshadowed by the expectation that there may be an extension in November, leaving a cloud hanging over the market in the meantime. That may make it difficult for sterling to stage any sustainable rally in the short term.
Data flow was mixed last week. The IMF upgraded its 2010 growth forecast for the UK (to 0.9% from 0.2%), but soft manufacturing data for September surprised to the downside as market watchers expected better figures off the back of higher exports. The Confederation of British Industy's retail sales figure was better than expected, and the final revision to Q2 GDP saw an improvement to - 0.6% from previously published -0.8%.
The commodity currencies have an extra tail wind this week. Gold is soaring to all time highs today (currently $1040 per ounce), and oil is also being dragged higher. That gives the Canadian Dollar a further boost and is helping it make new highs against the pound this morning. We are now testing the January low at 1.6750. Sterling has broken new lows against other commodity currencies in the last few days, so there is no reason to think that we won't see this exchange rate trade even lower.
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