UK and Canadian economic data headed in opposite directions
The pound sterling is threatening to close at the lowest level since August 19 against the Canadian dollar but the pair might be setting up for gains.
Technically, the pair has found support in 1.66-1.67 range so that presents a floor 300 pips below. Those more risk averse may also eye last week's low of 1.6892 for support.
Fundamentally, economic data in the UK and Canada has been headed in opposite directions. Citi's economic surprise index shows the UK as the top region and Canada dead last (by far).
The reason the pair hasn't rallied so far is that the Bank of England has remained steadfast that cuts are on the table for later this year on the delayed impact of the Brexit vote. In Canada, the BOC has started to warn about trouble in the economy but hasn't put a cut on the table yet.
The OIS market is pricing a 17.7% chance of a BOC cut by year-end and a 23% chance the BOE moves. I'd argue those probabilities should be reversed.
In the short-term, oil is a big factor for the Canadian dollar. Wednesday's OPEC decision sent pries 6% higher and it's impossible to bet against the loonie until crude hits a ceiling.
So there's no reason to rush into this trade but it's a great technical and fundamental setup.