Market Forecast - Sterling Vs. Canadian Dollar 29/09/09
Sterling has continued its slide since last week's update. Mervyn King's comments expounding the benefits of a weak pound continue to weigh on the market, giving traders little comfort in holding the pound. In other news, commentators are speculating that the Bank of England could introduce negative interest rates on bank deposits held at the central bank.
By penalising the banks for holding large cash reserves the Bank of England would hope to stimulate bank lending and improve the pace of economic recovery. The downside for sterling however, is that such a move would likely prompt a fall in interbank interest rates (as there would no longer be an interest rate advantage to holding cash), making sterling even less attractive. The Swedish Riksbank has already done exactly that, pushing market interest rates down to just 0.25%.
The Canadian dollar has rallied through the 1.7450 support level mentioned in recent reports. That adds a negative slant to the technical outlook and gives the impression that sterling will likely head for the January lows around 1.6750. Clients with CAD requirements should consider covering now to avoid further downside.
Market Forecast - Sterling Vs. Canadian Dollar 24/09/09
Sterling plunged this morning, spooked by a series of negative news reports and comments from Bank of England governor Mervyn King saying that sterling weakness was "helpful" in rebalancing the UK economy. We have been hinting at the Bank of England's implicit approval of sterling's slide for the last few weeks, and now they have come right out and said it!
That is unhelpful for the pound, which was just starting to gain a little traction yesterday following the release of the most recent Bank of England meeting minutes which showed that all nine members voted to keep the central bank's assets purchase programme (otherwise known as quantitative easing) on hold at £175bn. King's comments have overshadowed the relief rally that we saw yesterday, driving the Sterling/Canadian dollar rate back below 1.75.
There is implied price support at current levels, having been the May low and also the level we bounced from on Monday. However, with sterling breaking new lows against currencies like the Australian and New Zealand dollars, and also breaking below key support levels against the Euro today, we have no reason to believe that this level will hold.
We advise clients with CAD requirements to cover at least half now to avoid further downside.
Market Forecast - Sterling Vs. Canadian Dollar 17/09/09
Things were starting to look better for Sterling late last week as the latest Bank of England decision reassured investors. The lack of any further quantitative easing ("QE") gave traders a reason to buy the pound for once. Unfortunately that reason was removed this week as Bank of England governor Mervyn King gave another gloomy update in his quarterly inflation report. Labelling the durability of the recovery as "highly uncertain", he indicated that further easing could be in the pipeline. Inflation figures for August were slightly higher than expected, but this failed to offset the comments.
Meanwhile, the Canadian dollar has been further boosted by a rebound in commodity prices, in particular oil has rallied 4% over the last two days and gold is well above the key $1,000 per ounce mark. Sterling is now testing the key technical support at 1.7500. If we slip below there the outlook is grim, with the January low at 1.6750 being the next noteworthy support level. With the Bank of England continually knocking the pound with negative comment, we can't see any reason for a near term turnaround.
Market Forecast - Sterling Vs. Canadian Dollar 04/09/09
The spectre of further quantitative easing is still hanging over the pound, giving traders a green light to sell the currency. Data flow was also unsupportive, with a small upward revision in second quarter growth (up to - 0.7% from original estimate of -0.8%) being more than offset by better growth data from Europe which showed economic expansion for France and Germany over the same period.
Comparatively speaking that leaves the UK clearly lagging, and that is being reflected in the Sterling/Euro exchange rate. Meanwhile, sterling is also faring badly against the Canadian dollar, which is strengthening towards the 1.75 level that has been a regular support level over the last few months.
Another logical tailwind that has so far failed to positively impact the Canadian currency is the sudden rally in gold prices over the last two days. CAD is generally lumped into the so called "commodity currency" bracket along with the Aussie and Kiwi dollars, and the South African Rand. Of that group, CAD is the only one not to have strengthened against the pound in the last 48 hours.
Key US jobs data this afternoon may have an impact on CAD. Any major US data has ramifications around the world's financial markets, but particularly for Canada, which counts the US as its largest trading partner.
The technical outlook is precarious while we trade so close to the 1.75 support. A break below there could open the way to significant further downside, so we advise clients to hedge at least half of any CAD exposure at current levels, and take a "wait and see" approach to the balance.
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