Pound-to-Canadian-Dollar Rate Gains Won't Last Long Warns Scotiabank

Sterling suffered in the opening session of the new week after European parliament election results showed electoral support for the UK's two main parties collapsing in the wake of the Brexit farce that has played out in Westminster during recent months.

Voters abandoned the two main parties in their droves, with those who'd backed remaining inside the European Union in the June 2016 referendum now turning to a resurgent Liberal Democrat party while leavers turned out in force for Nigel Farage's newly-minted Brexit Party.

This now threatens to drag the two main parties further away from the so-called centre ground, with Conservative leadership candidates under pressure to support a 'no deal' Brexit and the Labour Party appearing to be eyeing a shift toward naked support for another referendum and remaining in the EU.

"The UK EU election results were bad for the Labour Party and catastrophic for the Conservatives who both paid for the weak and waffling pursuit of Brexit in parliament," says Shaun Osborne, chief FX strategist at Scotiabank. "This result seems liable to skew contenders for Conservative party leader towards a harder or no-deal Brexit. Sterling has, unsurprisingly, under-performed."

Above: Pound-to-Canadian-Dollar rate shown at daily intervals.

Pound Sterling suffered during the Monday session but had stabilised at lower levels early on Tuesday. The EU election results follow a decision by Prime Minister Theresa May on Friday, to announce her pending resignation, which has fired the starting pistol on a Conservative Party leadership contest.

That decision has created clear scope for a 'hard Brexiteer' to seize control of the government, with the parliamentary leadership contest now the only avenue through which remain-supporting MPs could stop such a thing.

The parliamentary party will select two preferred candidates from a crowded field who will then be presented to the heavily leave-backing and highly disgruntled party membership.

Such a process could easily result in members being furnished with a Hobson's Choice when it comes to the Brexit views of a new leader, although such a thing would further risk the party's position with the electorate.

"GBPCAD has traded well off the mid-week low now, leaving hammer-like signals on the daily and weekly candle charts. We are not persuaded that any GBP rally will amount to anything more than a corrective rebound in the short run," warns Eric Theoret, a technical analyst colleague of Osbourne's.

Despite the adverse political news emerging from the UK during the last week, Pound Sterling advanced against the Canadian Dollar Tuesday, although this was mostly because the intraday increase in the USD/CAD rate was greater than the fall in the GBP/USD rate.

Above: USD/CAD rate alongise GBP/USD rate (orange) at hourly intervals.

Commentary from Scotiabank and other firms across the industry suggests the market currently views newfound stability in Sterling exchange rates as little more than a dead-cat bounce that will soon be followed by fresh losses.

Ultimately, and as far as the Pound-to-Canadian-Dollar rate goes, the short-term direction will be dictated as much by the outcome of Wednesday's Bank of Canada (BoC) interest rate decision and statement as it will events in London.

The Bank of Canada will announce its latest interest rate decision at 15:00 London time on Wednesday and risks to the Canadian Dollar are finely balanced going into the event. Not least of all because the economy has surprised on the upside this last month, while the U.S.-China trade war has escalated again.

"We think the GBP break of support at 1.73 last week and the slide below the base of the rising channel in place since Oct point to more weakness ahead. Trend oscillators are aligned bearishly—if weakly—for the GBP and monthly price action is shaping up to be especially bearish for the GBP," warns Theoret.

Above: Pound-to-Canadian-Dollar rate shown at weekly intervals.

The BoC completed in April, a multi-month u-turn on earlier interest rate guidance that saw it go from preparing financial markets for as many as three-to-four interest rate hikes this year, to warning the next move in the cash rate could be either up or down.

Weakness in the global economy and threats to domestic business investment stemming from the U.S.-China trade war, not to mention uncertainty over the new North American Free Trade Agreement, were behind the policy shift.

The BoC's concern has been that global weakness would soon bite the Canadian economy. Since its last  rate decision, the U.S.-China trade fight has escalated dramatically but the economy has surprised on the upside.

Official data recently showed the economy creating jobs at its fastest pace since 2010 while, on Friday, GDP data is expected to show the economy stabilising at the end of a weak first quarter. As a result, Wednesday's BoC statement could prove to be either a boon or a bane for the Pound-to-Canadian-Dollar rate.

"We think corrective gains are likely to remain limited to the mid-1.71s for now and expect minor GBP gains to attract renewed selling interest," Theoret signs off a recent note.