Data from Canada has been relatively benign. A 1% improvement in September retail sales was balanced against a record trade deficit in the third quarter as imports of cars surged. In jobs data out this afternoon economists are expecting a net rise of 15,000 jobs in November after a decline of over 40,000 the previous month, while in the US payrolls are expected to have declined by.

Given the fact that sterling is hardly outperforming lately, the only clear driver of the GBP/CAD rate has been weakness in CAD, led chiefly by a correction in oil prices. January crude oil peaked around $82 per barrel in October, just a few days after CAD peaked at 1.6250. Since then oil has drifted back to $76, and the Canadian dollar has mirrored that weakness. Crude oil is Canada's largest export. Gold is also an important natural resource for the country, which accounted for 4.2% of the world's mine production in 2008. However, the soaring gold price in recent weeks has had little impact on the currency.

The technical outlook for sterling remains positive. The October rally has been followed by five weeks of corrective price action, which gives us the feeling that we are likely to see a continuation of that rally in due course. As we've said in recent reports, we would revise this view if the market breaks below 1.7110. There is also apparent price support at 1.7260. Clients with CAD requirements should consider placing stop orders below 1.7110 (based on interbank rates) to protect against a resurgent CAD.

The short squeeze that helped sterling surge in October has failed to follow through into November. The pound has still managed to defend our key near term support at 1.7110, and while it continues to do so we are giving it the benefit of the doubt. It would take a fresh break above 1.7940 to signal a new up leg, and a further rally up through 1.8300 would ask serious questions of the longer term down trend. Let's not get ahead of ourselves ! For now we recommend that clients with near term CAD requirements cover half now and take a "wait and see" approach on the balance. Keep in mind that a break below 1.7110 would in our view signal a likely deterioration back towards the October lows around 1.6250.

"A short squeeze happens when speculators who have sold the pound in expectation of further declines are forced to re-buy the currency to close their bets and stem losses. This situation can develop with little warning when large numbers of traders are caught "offside" when a market turns unexpectedly." - Last update

The short squeeze continued into the end of October, and the new month has seen us trade in a corrective range between 1.75 - 1.80.

Last week's Bank of England meeting was widely expected to result in a further increase to QE, but traders were relieved that the bank extended the bond purchasing programme by just £25bn, and not the £50bn that some expected. Sterling duly rallied, breaking new high ground against the Euro and US dollar this week, but found it harder going against the commodity currencies which are still enjoying the tailwind of record gold prices, and oil bumping along close to 12 month highs. The Canadian dollar is benefitting from a continued flow out of its US counterpart. While yields between the two are flat, the exodus from USD is helping gold, which in turn is supporting CAD. The US currency plunged on Monday following comments from the G20 over the weekend, indicating that interest rates would need to remain low for some time yet. A weak US dollar dents Canadian exports, leading Bank of Canada governor Mark Carney to vocalise his desire for currency stability. Intervention by BoC is almost certainly not an option however, as the US dollar down trend is broad based. Competitive devaluation will continue to be governed by monetary and fiscal stimuli rather than direct participation in the markets.

The technical outlook remains positive as long as we continue to trade close to recent highs. While there can be no guarantee that sterling is out of the woods yet, the extreme levels of pessimism reached last month could signal a major low. That pessimism was characterised by a sense of general resignation that the pound was heading for parity against the euro! That is still possible, but in the short term we would like the pound to defend 1.7500 and certainly 1.7110 in order to maintain the initiative.

Sterling enjoyed a strong rally into the end of last week after bullish comments from Bank of England policy maker Paul Fisher noting that quantitative easing is working well. The scene was already set for some sort of rebound after better than expected UK jobless figures, but the Fisher comments sparked a full blown "short squeeze" on Thursday morning. A short squeeze happens when speculators who have sold the pound in expectation of further declines are forced to re-buy the currency to close their bets and stem losses. This situation can develop with little warning when large numbers of traders are caught "offside" when a market turns unexpectedly. The commodity currencies are fighting back this morning against a backdrop of higher oil prices, in particular the Australian and New Zealand dollars; but the Canadian dollar's reaction has been more muted this morning.

There is still some debate over whether the Bank of England may extend so called "QE" at the November meeting, but traders will be focussing on Wednesday's release of the October meeting minutes to get a real view of how that debate is looking inside the nine member Monetary Policy Committee.

Options traders have been increasing bets that the Canadian dollar will reach parity against its US counterpart this year. Buoyed by strong commodities CAD has already rallied 25% against the dollar since March, and looks set to continue that trend. So while sterling is having some success in rising against the US dollar this year, CAD will be a tougher nut to crack.

The technical outlook is mixed, but sterling has bought itself at least a temporary reprieve after recapturing the old lows around 1.6750. We would be concerned if the pound dips below 1.6500 again. Buyers of CAD who still have time on their side should consider covering half of any requirement now while the rate is trading well off the recent lows. Meanwhile, we would take a "wait and see" on the balance, or place a stop order below 1.65 (based on the interbank rate. The rate you receive will depend on the volume of currency you are trading).

Sterling fell again yesterday after an unexpected decline in manufacturing during August. Output fell 1.9%, the steepest decline since January. Analysts had been expecting a small rise.

In other news, the Reserve Bank of Australia raised interest rates yesterday in a surprise move. A quarter point hike puts the overnight rate at 3.25%, up from 3.0%. Analysts had widely expected no change, although there was an underlying impression that the RBA statement would include reference to possible future rate hikes.

Sentiment towards the pound improved marginally last week as traders started to look forward to this month's Bank of England meeting this Thursday, with the all important quantitative easing package expected to remain on hold at £175bn; but that sentiment is overshadowed by the expectation that there may be an extension in November, leaving a cloud hanging over the market in the meantime. That may make it difficult for sterling to stage any sustainable rally in the short term. Data flow was mixed last week. The IMF upgraded its 2010 growth forecast for the UK (to 0.9% from 0.2%), but soft manufacturing data for September surprised to the downside as market watchers expected better figures off the back of higher exports. The CBI's retail sales figure was better than expected, and the final revision to Q2 GDP saw an improvement to - 0.6% from previously published -0.8%.

The commodity currencies have an extra tail wind this week. Gold is soaring to all time highs today (currently $1040 per ounce), and oil is also being dragged higher. That gives the Canadian Dollar a further boost and is helping it make new highs against the pound this morning. We are now testing the January low at 1.6750. Sterling has broken new lows against other commodity currencies in the last few days, so there is no reason to think that we won't see this exchange rate trade even lower.

Sterling has continued its slide since last week's update. Mervyn King's comments expounding the benefits of a weak pound continue to weigh on the market, giving traders little comfort in holding the pound. In other news, commentators are speculating that the Bank of England could introduce negative interest rates on bank deposits held at the central bank. By penalising the banks for holding large cash reserves the BoE would hope to stimulate bank lending and improve the pace of economic recovery. The downside for sterling however, is that such a move would likely prompt a fall in interbank interest rates (as there would no longer be an interest rate advantage to holding cash), making sterling even less attractive. The Swedish Riksbank has already done exactly that, pushing market interest rates down to just 0.25%.

The Canadian dollar has rallied through the 1.7450 support level mentioned in recent reports. That adds a negative slant to the technical outlook and gives the impression that sterling will likely head for the January lows around 1.6750. Clients with CAD requirements should consider covering now to avoid further downside.

Sterling plunged this morning, spooked by a series of negative news reports and comments from Bank of England governor Mervyn King saying that sterling weakness was "helpful" in rebalancing the UK economy. We have been hinting at the BoE's implicit approval of sterling's slide for the last few weeks, and now they have come right out and said it! That is unhelpful for the pound, which was just starting to gain a little traction yesterday following the release of the most recent BoE meeting minutes which showed that all nine members voted to keep the central bank's assets purchase programme (otherwise known as quantitative easing) on hold at £175bn. King's comments have overshadowed the relief rally that we saw yesterday, driving the Sterling/Canadian dollar rate back below 1.75. There is implied price support at current levels, having been the May low and also the level we bounced from on Monday. However, with sterling breaking new lows against currencies like the Australian and New Zealand dollars, and also breaking below key support levels against the Euro today, we have no reason to believe that this level will hold.

We advise clients with CAD requirements to cover at least half now to avoid further downside.

Things were starting to look better for Sterling late last week as the latest Bank of England decision reassured investors. The lack of any further quantitative easing ("QE") gave traders a reason to buy the pound for once. Unfortunately that reason was removed this week as BoE governor Mervyn King gave another gloomy update in his quarterly inflation report. Labelling the durability of the recovery as "highly uncertain", he indicated that further easing could be in the pipeline. Inflation figures for August were slightly higher than expected, but this failed to offset the comments.

Meanwhile, the Canadian dollar has been further boosted by a rebound in commodity prices, in particular oil has rallied 4% over the last two days and gold is well above the key $1,000 per ounce mark. Sterling is now testing the key technical support at 1.7500. If we slip below there the outlook is grim, with the January low at 1.6750 being the next noteworthy support level. With the BoE continually knocking the pound with negative comment, we can't see any reason for a near term turnaround.

The spectre of further quantitative easing is still hanging over the pound, giving traders a green light to sell the currency. Data flow was also unsupportive, with a small upward revision in second quarter growth (up to - 0.7% from original estimate of -0.8%) being more than offset by better growth data from Europe which showed economic expansion for France and Germany over the same period. Comparatively speaking that leaves the UK clearly lagging, and that is being reflected in the Sterling/Euro exchange rate. Meanwhile, sterling is also faring badly against the Canadian dollar, which is strengthening towards the 1.75 level that has been a regular support level over the last few months. Another logical tailwind that has so far failed to positively impact the Canadian currency is the sudden rally in gold prices over the last two days. CAD is generally lumped into the so called "commodity currency" bracket along with the Aussie and Kiwi dollars, and the South African Rand. Of that group, CAD is the only one not to have strengthened against the pound in the last 48 hours.

Key US jobs data this afternoon may have an impact on CAD. Any major US data has ramifications around the world's financial markets, but particularly for Canada, which counts the US as its largest trading partner.

The technical outlook is precarious while we trade so close to the 1.75 support. A break below there could open the way to significant further downside, so we advise clients to hedge at least half of any CAD exposure at current levels, and take a "wait and see" approach to the balance.