BoC’s deputy governor talks down the Canadian dollar

The UK Office for National Statistics reported a better-than-anticipated inflation rate in August. That sparked hopes of a rate hike in November. Furthermore, Mark Carney, the Bank of England’s governor, had hinted about the possibility of a rate hike soon.

All these factors ensured a rally in the GBP/CAD pair in September. The GBP/CAD pair has gained about 700 pips so far this month to trade at 1.6500 levels. Still, we expect the uptrend to continue due to reasons given below.

While giving a speech to the Saskatoon Regional Economic Development Authority, Bank of Canada’s deputy governor Timothy Lane remembered the disastrous effect a Canadian dollar had on the country’s non-resource exporters during the 2008 financial crisis.

Furthermore, Lane stated that Bank of Canada will certainly monitor the impact of both the stronger Canadian dollar and higher interest rates on the economy, before making any interest rate decisions.

RT UK

Notably, the recent economic data that followed the rate hike was not impressive. According to Statistics Canada, the headline consumer inflation rose by only 0.1% m-o-m in August and was below the Consensus estimates of a 0.2% rise. Similarly, core retail sales grew only at 0.2%, versus analysts expectations of a 0.4% growth. Even the previous month’s retail sales were revised downward from 0.7% to 0.4%.

Commenting on Lane’s speech, Joe Manimbo, senior market analyst at Western Union, is of the opinion that the central bank is not comfortable with the recent appreciation of the Canadian dollar, as it believes the economic growth and inflation would be affected. Shaun Osborne, a strategist at Scotiabank, echoes a similar opinion as Manimbo. Osborne believes that Timothy Lane has deliberately issued a voice of concern over the recent Canadian dollar’s rally in order to play down the market’s expectations of another rate hike in the near future. While the BoC’s deputy governor talked down the Canadian dollar, the Pound had an unexpected boost from Donald Tusk, the President of the European Council.

After a meeting with the UK’s Prime Minister Theresa May, Tusk stated that he is cautiously optimistic about the recent constructive efforts taken by the British government to resolve the Brexit issue, even though talks related to Brexit has not made much of a progress.

On Friday, while giving a speech in Florence, May had stated that the UK is willing to maintain a payout to the EU, in return for a two year transitional deal. The fourth round of negotiations between the EU and UK is currently underway in Brussels. The GBPCAD pair has been consolidating at 1.6550 levels for the past ten days. Furthermore, the stochastic-RSI indicator is in the oversold region. Thus, we can expect a topside breakout to happen soon. The next major resistance is expected at 1.7050 levels.

In the spot forex market, we wish to open a long position in the GBPCAD pair near 1.6660. To limit risk from unexpected volatility, a stop loss order will be placed below 1.6550. If the pair rises as per the forecast, then the profit would be booked near 1.6880.

We may also consider investing in a call option offered by a suitable binary broker listed here. A strike price of about 1.6660 looks ideal for the trade. Additionally, we prefer the option’s expiry date to be around October 8th

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