Since May 2017, the Canadian Dollar has been one of the strongest performing currencies, thanks to positive economic data and a shock interest rate change from Canada’s central bank.
The start of September saw the Canadian currency at nine-month highs against the British Pound. The GBPCAD exchange rate fell from C$1.78 in May 2017 to C$1.58 at the end of August and that low was on a par with the drop we saw at the start of 2017. The Canadian Dollar was boosted against the US Dollar, following a raft of strong economic performance figures and the Bank of Canada’s (BoC) surprise interest rate hike to move the rate up from 0.75 percent to 1.00 percent. Markets had expected interest rates to remain on hold, so the ripple effects of the decision caught a number of markets and the Canadian Dollar’s key currency pairings off guard.
There were also more surprises in the latest Canadian housing market figures; higher than the previous month and another indicator of higher than anticipated economic growth. The Bank of Canada (BoC) will be keeping a close eye on the strong labour market and increased home building, alongside continued healthy consumer confidence. With these strong signs of economic strength for Canada, their central bank is not likely to need to raise interest rates again for the rest of the year, but they have surprised markets on several occasions throughout 2017, so watch this space...
In the meantime, Sterling’s sudden strength following the Bank of England (BoE) announcements, hinting at interest rate rises, could challenge the hold the CAD has had over GBP in recent months, so it looks like the tide could be turning…
GBP-CAD has now climbed above a major trendline and peaked at 1.6670. A break above 1.6700 would suggest a continued uptrend, targeting 1.6960.
Guidance for CAD buyers
The risk averse amongst you may choose to trade now. Sterling’s rally shows signs of losing short term momentum – and with Brexit negotiations firing up again next week, we would expect to see the Pound come back under pressure. As mentioned above, resistance levels can be seen at C$1.67 and just below C$1.70. Anything near these levels is a good short to medium term buy.
Guidance for CAD sellers
The risk averse could choose to hold fire for now. The Bank of Canada’s aggressive monetary policy of late looks set to keep the Canadian Dollar relatively strong and Sterling’s recent strength appears to have taken a step backward since BOE Governor Carney warned of Brexit risks. The previous low of C$1.58 is an obvious medium term target but Sterling may not capitulate completely. So the short term target of C$1.62 (a 50% retracement of the recent rally) is a sensible short term target. If the Pound pushes the Canadian Dollar above C$1.701, the whole market will have changed, so waiting beyond that may prove expensive.