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Canadian Dollar Research Report

Published: Tuesday 01 December 2015

November saw Sterling struggle against most of the majors, only making head way Vs the Euro.  The trigger for the decline in Sterling was the weaker than expected Bank of England Quarterly Inflation Report released on the 5th of November.  The Inflation Report is the Bank of England’s (BOE) assessment of the current economic conditions and its forecasts for the coming months. 

The BOE downgraded their inflation outlook and made every effort to quell hopes of a 2016 Interest rate hike.  With some Monetary Policy Committee (MPC) members suggesting that the next move in UK interest rates could even be lower.  Inflation is not expected to return to the target rate of 2% for a couple of years and as such UK interest rates are likely to remain on hold until 2017.

This point was re-iterated by weaker than expected UK inflation data (in terms of both wage price inflation and consumer price inflation) and disappointing UK Retail Sales figures that failed to build on the momentum of the Rugby World Cup.

The Canadian economy created 44.4k jobs in October which was significantly more than the 10k expected, pushing the unemployment rate to 7% from 7.1% and the participation rate up to 66%.

Technically, the shifting fundamental picture has had limited impact on the exchange rates.  As GBPCAD has been stuck within a trading range between 2.00 & 2.03 since the middle of October.  For the time being, this range looks set to continue and should be worked within.  If the market does make a confirmed break below 2.00 (3 daily closes or a weekly close below 2.00 would suggest the level has been broken) the next level of support is the recent low of 1.975.

Initially, any break to the topside will encounter resistance at 2.05 and then the multi-year high of 2.10. 
Over the longer term we do remain within an uptrend that has been in place since April 2013. A break below 1.975 would point to a pro-longed period of consolidation/correction prior to resumption of the uptrend.  The uptrend support is currently in the 1.90 region, a break of this would be a real concern and would suggest the trend has changed. 

It depends on time frames, if you’re looking to trade in the coming days/weeks then placing orders within the current range 2.00-2.02 seems sensible with a stop loss just below 2.00.  If you have a bit more time or wish to be a bit more aggressive with the placement of your orders then 2.03-2.05 on the top side with a stop loss order below 1.975 makes sense.  If there is no time pressure at all, then targeting a rate in the 2.05-2.10 region makes sense as long as we remain within the longer term uptrend. 

There is a saying in the market, let the trend be your friend.  In this scenario, the long term trend is against you so making your move sooner rather than later makes sense.  I would recommend the placement of orders around support at 1.975 and 2.00 depending on your appetite for risk.  I would also consider the placement of a stop loss order above 2.03 as a break of this level points to a resumption of the uptrend.