Above: Bank of Canada's Macklem is in focus this week. Above: BoC Governor Macklem. Image © Bank of Canada, Reproduced Under CC Licensing.
The Pound's run higher against the Canadian Dollar shows no signs of a letup. But surely the time has come for a temporary pullback?
It's been a relentless rally for the Pound-to-Canadian Dollar exchange rate (GBPCAD)that makes this rally extremely overbought; yet, we hesitate to call a top in the market.
For some time now, GBP/CAD has been overbought, with the relative strength index (RSI) on the daily chart sitting above 70:
Above: GBP/CAD at daily intervals.
It is unusual for this condition to last this long - GBP/CAD's RSI has been overbought since February 25 - as the RSI is highly prone to reverting to levels below 70 through a retracement or consolidation.
The setup speaks to the remarkable forces buffeting the Canadian Dollar, with the currency also being oversold against a host of other peers, as investors see the currency as particularly prone to U.S. tariffs and threats.
Interestingly, the CAD is holding up remarkably well against the U.S. Dollar, which also appears to be a victim of the tariff trade. Given the tariff war and the incredible U.S. hints at the annexation of Canada, it's little wonder that the two North American currencies have been struggling lately against other G10s.
GBP/CAD is due for a correction, and maybe this will be the week it finally happens. If so, we would look for a retreat back to the rising nine-day exponential moving average, currently at 1.84.
However, expect weakness to be shallow for now, as tariff headlines will persist through to the April 02 deadline for the big reciprocal tariff announcements due from the U.S.
New highs in GBP/CAD beckon.
Image © Bank of Canada, Reproduced Under CC Licensing
Turning to domestic event risks, the week ahead is dominated by the Bank of Canada decision.
The consensus expects the Bank to cut the overnight policy rate by 25bp on March 12, leaving it at 2.75%.
The cut will widely be interpreted as an insurance cut owing to the introduction of U.S. tariffs and Canada's own reciprocal measures.
Uncertainty around the tariff outlook will also weigh on economic activity, which should prompt the Bank to act.
Canadian inflation is comfortably within the Bank's target zone, which will make the decision a comfortable one.
"We believe that the BoC will decide to lean against the economic downturn and provide additional support to the Canadian economy by cutting more. In this way the CAD could be a buffer," says a note from Bank of America.
Lower interest rates spell ongoing Canadian underperformance, which will help Canada's under-pressure exporters.
However, currency strategists at Bank of America caution to expect this week's decision to have limited impact on the exchange rate as tariff negotiations continue, and there is uncertainty over the timing of the upcoming election.
Given the negatives 'priced in', the CAD could be ripe for a relief rally.