GBP vs Canadian dollar: Rate at Risk of Breaking Lower

By Gary Howes

The pound sterling's (GBP) momentum against the CAD has waned with the month of March seeing little progress made. But, are things about to get a whole lot worse?

The GBP to CAD exchange rate is seen trading lower at 1.8300 in early trade on Friday the 28th in London

The losses come even as the British pound (GBP) is seen rallying elsewhere suggesting moves here are clearly being dictated to by the CAD.

Many commentators are saying the carry trade is back on - i.e investors are sending money where interest rates are greater, with Canada, New Zealand and Australia benefiting.

UK Retail sales data saw the GBP initially strengthen against the Canadian unit on Thursday, but subsequent losses confirm momentum is headed in the opposite direction.

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Why is the Canadian dollar strong?

We would argue that the CAD is taking heart from gains seen elsewhere in the commodity currency complex - the NZD and AUD are the currencies to beat at present.

In addition we see the US dollar is struggling to really assert itself as the US yield curve flattens - we will have to see yields rise before the USD can really move ahead.

Until such a time the headline USD-CAD could struggle, and the GBP-CAD looks to be driven mores by the CAD part of the equation than the GBP element.

So, we wait for weakness in the C$ and with little by way of event-risk due in Canada we could see the rate grind yet lower.

The US dollar meanwhile suffers as US data fails to impress. In the past equities may have been supported as poor data translated into the possibility of the the Fed Taper being delayed.

With a clear path to the taper and first US interest rate rises now being communicated to markets bad data is doing what bad data should intuitively do - send stocks lower.

This also has the knack of sending US yields lower and thus the dollar.

"The AUD, CAD and NZD have been firm partially because the US data have underwhelmed so far this week, and the EUR has fallen more vs. the commodity bloc than vs. the USD.  It appears that the bar for the US data to cross may be higher whilst the Fed is still expanding the size of its balance sheet," says Stephen Gallo at BMO Capital.

Lee Mumford at Spreadex comments on today's US data:

"US equities opened in the red, following yesterday’s biggest drop in two weeks. European markets also remained in negative territory amid data which showed the economy grew slower than analysts’ estimated last quarter. However, US unemployment claims unexpectedly fell to 311,000, beating the 326,000 estimate.

Further, "investors remained nervous following President Barack Obama’s comments last night after he warned the crisis in Ukraine may escalate. Investors took this opportunity to take some risk of the table, sending markets lower."