Outlook for Canadian dollar exchange rate: CAD steams ahead vs majors, Pound sterling holds ground

By Gary Howes

The recovery in the Canadian dollar continues apace on Monday, the outlook does however suggest the CAD will face challenging conditions.

A look at the FX markets on Monday shows:

• The pound sterling to Canadian dollar exchange rate is 0.04 pct higher on a daily basis at 1.8283.
• The US dollar to Canadian dollar exchange rate is 0.4 pct lower at 1.1042.
• The euro to Canadian dollar exchange rate is 0.52 pct lower at 1.5086.

Be Aware: All CAD quotes are taken from the inter-bank markets. Your bank will deliver your currency after levying a spread on the rate. However, an independent FX provider will guarantee you a more competitive spread, thus delivering up to 5% more currency. Please learn more here.

"With Canadian inflation figures as expected, speculation that the BoC may decide to cut interest rates eased. This helped the loonie to reverse losses driving the rate downwards by nearly two cents in the last session," says Sasha Nugent at Caxton FX in reference to the rebound being witnessed by the Canadian dollar.

With little to encourage sterling momentum, sideways trading looks most likely for the GBP today.

British pound hit by Carney comments

Meanwhile, we are seeing the British pound fight back following a period of hefty selling pressures.

At the centre of the sell-off is Bank of England governor Mark Carney.

Moneycorp tell us:

"Buried within Mark Carney's speech in Davos last Friday was the apparently innocuous phrase; "the appreciation of sterling will hold back the expansion of net exports".

"It was not even a sentence but the moment investors picked up on it they sold the pound, sending it a cent lower against the US dollar and half a cent lower against the euro. The South African rand saved sterling from being the weakest performer on Friday but the pound still lost an average of 0.7% - one and a quarter US cents - against the dozen most actively-traded currencies."

Outlook for the Canadian dollar: Risks skewed to the downside

Is the beginning of an extended CAD rally? Most probably note says Stephen Gallo at BMO Capital:

"All things being equal, we expect USD/CAD to basically tread water in a 1.100-1.1075 range heading into Wednesday.  

"CAD macro risks are still skewed to the downside, so participants should look to this range to position for more CAD weakness over the coming 1-3 months."

At the same time, Emerging Market (EM) distress is at least partially to blame for the halt in the upward march of long-term US yields.

EM distress is therefore also partially responsible for the inability of USD/CAD to trade back above 1.110.

"This should keep USD/CAD rallies fairly well capped within the aforementioned range for now.  If for whatever reason US long-term yields spike, however, 1.1075 should be broken to the topside quite quickly.  But this spike in yields does not seem that likely for the time being, given what is taking place in the EM space, and given the coming FOMC statement on Wednesday," says Gallo.

The US Fed is another risk event to be aware of with a potentially dovish FOMC and another collapse in long-term US yields on ‘safe haven’ demand having the ability to upset the USD/CAD market in the first few days of the week.  

"We therefore view the ultra-short-term risks in the pair as skewed more towards the 1.095-1.100 range over that time period.  If there is going to be a sharp spike in USD/CAD during the first three days of the week, this is the direction we’d expect it to be in," says Gallo.  

If EM distress settles down somewhat and the FOMC is generally ‘as expected’, downside USD/CAD risks should gradually diminish towards the back-end of the week, when November GDP data are due from Canada.