Last week saw a substantial move for the Canadian Dollar as they kept key interest rate on hold at 0.5%. The BoC said that risks to inflation remained roughly balanced, despite a renewed decline in oil prices and sluggish economic growth. They went on to say that they expect inflation to climb to 2% by early 2017, while core inflation would remain around 2%. While declines in oil and other commodities have not helped, they attributed the slowdown in the first quarter of 2015, due to the temporary softness of the US economy at the time. The BoC now expects the economy's return to be delayed until the second quarter of 2016. The central bank projects that the nation's economy will grow by about 1.5% in 2016 and 2.5% in 2017.
Following the decision to keep rates on hold last week, the Canadian Dollar rallied 3% against the Pound moving from the 2.08 region down to just above 2.02. Since then, continued concern with oil and the general outlook of the economy has seen the Canadian Dollar lose some of the gains seen last Wednesday. Unless oil sees a major turnaround, we would expect to see the GBPCAD pair trickle back towards resistance levels in the 2.07-2.08 region. Brent and crude oil dropped below US$29 per barrel, with Brent sliding to a twelve-year low on the 19th
of January. Oil oversupply worries have continued as Iran returned to the export market with the United Nations lifting sanctions that paved the way to increase oil production by 500,000 barrels per day.
That said, in the short term it sees the Canadian Dollar continuing its strength. Markets are keeping a close eye on the tentative signs from OPEC that they may be ready to cooperate with global oil producers and cut production to stem the current oil flood. While the chances of an alliance between the world’s oil producers seem unlikely, the fact that OPEC are responding to the market crisis suggests an acknowledgement that the current situation of over-pumping has gone too far.
We have seen a 100% retracement of the move from the December low of 1.9923 up to the high 2.0953. The momentum indicators look a little oversold at the moment so it may be worth holding on for a while to see if the current level holds and we bounce. If we break 1.9900 a quick test towards the longer term support of 1.9500 is on the cards.
It's looking good at the moment although the market does seem a little stretched. I would suggest reducing near term exposure here although a defined break of 1.9900 would open up a move towards 1.9500.
Research Report by Michael Hart
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