GBPCAD Analysis (July, 2021) Pingdemic Slows Growth
The UK had a great recovery period since lockdown restrictions started to ease. Now that restrictions have been fully released people are now able to meet whoever they want, eat indoors and even go clubbing. These events have caused a massive rise in infections across the country which means with current regulations if you test positive or you have symptoms of the infection you need to self isolate in-doors.
Many people are now receiving notifications that they've come into close contact with infected people and require self isolation. This has caused a huge shortage in staff within many businesses which has caused some business to indirectly close doors due to not enough staff being able to work.
These "pings" from the NHS app are causing huge disruptions from retail all the way to hospitality and supply chains.
The UK's PMI index has slowed down since June showing a clear sign there's a decline in growth and demand.
Logikfx technology summary
Overall, the technology summary shows us at a high level what the main fundamental indicators are suggesting and the trending movements we're seeing over the past few months.
What we've identified is that three out of the four indicators are showing bearish signs for GBPCAD which indicates to traders that GBPCAD is potentially in for a down trend.
Now that we know at a very high level that we should be looking for bears coming in on GBPCAD we can start digging into the details on each indicator and look into more analysis such as the trade analysis and price trends.
Macro currency strength meter
The macro currency strength meter which is ranked as one of the best currency strength meters on the market has shown interesting bearish signs over the past 2 weeks.
Focusing on the solid blue line which shows the base currency (GBP) we started off early June in a strong region above 0. However, since the 12th of June the GBP line has started to fall and trend downwards. It's now sitting in a contractionary level below -5 which means we should be bearish on GBP base pairs.
On the flip side when we're taking a look at the quote currency dotted line (CAD) it's showing the exact opposite. CAD started off June with a weak outlook sitting below -10. We now see CAD has slowly trended upwards and no peaking above it's previous high point on the indicator with room to grow.
This overall has created a bias to be bearish on GBPCAD with a strong currency strength meter crossover happening on 17/07/2021.
GDP differential indicator
The GDP differential indicator shows us the overall output of each economy selected. In this case we're seeing that the UK and Canada are growing in 2021 quite significantly however in 2022 the IMF are forecasting that the UK will outpace Canada slightly.
This overall forecast is actually a long term bullish indicator so it goes against our current outlook.
Trade analysis (imports/ exports)
Gold has been a major export/ import in the United kingdom which is strange considering they don't actually have large mining operations in the UK itself but store lots of gold for various people as part of it's finance industry.
Over the past 11 years of data comparing GBPCAD against Gold prices we're seeing a strong negative correlation. This shows as prices rise for gold we see prices for GBPCAD drop.
Most recent data is showing a spike in gold prices since June which could mean for the rest of this month if the risk off environment continues we could see GBPCAD fall further.
West Texas Intermediate (WTI) is a barometer of crude oil prices, especially the oil mined and refined around North America/ Canada. This commodity is crucial to analyse against any CAD pair.
What we've seen over the past year is a huge spike in oil prices. This price hike is incredibly bearish for GBPCAD as it has a negative correlation against WTI.
Overall our trade analysis shows that we should also be looking bearish in the long term for GBPCAD.
Interest rate differentials
The interest rate differentials are one of our monetary policy signals on the markets. We're comparing the interest rates of the United Kingdom against Canada to identify where investors would prefer to hold assets that are earning more interest on the base currency.
In this case we can see that interest rates in the UK are sitting lower than Canada which means investors would prefer to hold their money in Canada rather than the UK.
This is overall bearish for our GBPCAD idea.
Stock market analysis
The stock market is a huge gauge of economic health, in this case we've selected the FTSE100 which tracks the performance of the UK's top 100 companies.
Although, the FTSE100 has climbed significantly over the past year we're actually seeing that if we price it in Canadian dollars that it's yet to climb to new highs which gives us a bearish outlook on GBPCAD. One thing to keep an eye on however is that the FTSE100 is climbing and if it continues to climb at this pace our outlook can change.
Overall, a bearish sign in the stock market which agrees with the analysis.
Hedge fund positioning - COTA
The commitment of traders report (COT) is a key report used by traders to identify overall the open interest in the markets. It helps signal key shifts in market sentiment which can mean the difference between a trend or an upcoming reversal.
What we've identified on our COTA tool is that hedge funds are overall still buying both the GBP and the CAD. However, overall they're starting to switch their GBP long positions for shorts over July as the blue line trends downwards. This overall shows that hedge funds are buying more CAD than GBP.
We need to keep in mind here however that there's not a full conviction that hedge funds have fully committed to more short positions meaning we'll be trading against market sentiment until confirmed by negative open interest on GBP.
Price trends
Price trends on GBPCAD have overall been bullish the past year which saw a slight dip this month. If we start to see further technical signs that a bearish reversal is happening then it could mean bearish positions are starting to accumulate.
