Pound-Canadian Dollar Rate Week Ahead Forecast: Downside Bias Tipped to Persist

- GBP clings to portion of earlier gain but to be tested this week.

- November GDP, CPI, retail sales and BoE speakers coming up.

- Canadian jobs market pared most of November's decline last month.

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- GBP/CAD spot rate: 1.6991, down 0.30% today

- Indicative bank rates for transfers: 1.64-1.65

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The Pound-to-Canadian Dollar exchange rate is under pressure at the start of the new week, in line with an ongoing loss in value that has been in place since mid-December.

The trend in the currency remains negatively aligned, and therefore the overall bias heading into the new week is for further losses.

Above: GBP/CAD rate at 4-hour intervals with Fibonacci retracements of the post-August uptrend marked out. 

Sterling's latest declines come on the back of comments from outgoing Bank of England (BoE) Governor Mark Carney who said there remained a strong case for lowering interest rates in light of ongoing economic weakness in the UK, and market expectations for an interest rate cut to be delivered by the Bank in early 2020 have increased.

The rule-of-thumb is that currencies tend to fall when their issuing central bank enters an interest rate cutting cycle. The threat to the Pound of another interest rate cut was reinforced over the weekend by Bank of England policy maker Gertjan Vlieghe who said he would vote for a rate cut if there was no sign of a rebound in activity after the election.

"GBP/CAD traded sideways through the New Year," writes Juan Manuel Herrera, a strategist at Scotiabank in a note last week. "The mid-December swing lower in the GBP, which formed daily and weekly bearish reversal signals in the process, implies that a downside bias will persist for the cross in the near term at least."

Herrera says the extended run higher form the August low point may have further to correct, potentially to the 1.65/1.67 region, before the cross can stabilize."

The Pound turned a corner in August 2019 after Parliament voted to outlaw a 'no deal' Brexit, while the currency took another leg higher when Prime Minister Boris Johnson returned from Brussels with a new Brexit deal. December's election victory brought on another noteworthy move higher as markets saw the prospect of a 'no deal' Brexit fading alongside the threat of a hard-left Labour government being installed under Jeremy Corbyn. 

GBP/CAD is now paring those gains and could need a new catalyst in order to drive it higher again.

Strong economic data could be a trigger to a recovery in Sterling, however for GBP/CAD the ongoing resillience in the Canadian economy, as well as little signs of interest rate cuts at the Bank of Canada, could keep gains limited. 

Bank of Canada (BoC) Governor Stephen Poloz "does not sound like a central banker itching to cut rates. The December rebound in jobs (which helped bring total job growth for the 2019 year to 320k – the most since 2007) lessens the risk of a near-term rate cut further and gives the – still undervalued – CAD a little more support," says Shaun Osborne, chief FX strategist at Scotiabank. 

Above: GBP/CAD rate at daily intervals with Fibonacci retracements of the post-August uptrend marked out. 

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Pound Sterling: What to Watch

Pound Sterling was rocked last week when BoE Governor Mark Carney surprised the market with a 'dovish' speech that's elevated the importance of economic figures due for release in the days ahead.

Carney said the MPC is contemplating whether to bolster their anticipated economic pick up with an easing of monetary policy and that interest rate cuts will follow any signs that the economy has softened further. He also claimed the bank has scope to provide stimulus equivalent to 250 basis points of rate cuts even though Bank Rate is at just 0.75%, before suggesting there's scope to double the size of its £60 bn post-referendum quantitative easing package.

"Comments from Bank of England governor Mark Carney and Silvana Tenreyro suggest that the central bank may have ended their Brexit moratorium and be edging towards a rate cut. If so, this would probably take place at the 7 May meeting. The UK jobs data will probably have the biggest say as to whether the BoE cuts rates," says Chris Turner, head of FX strategy at ING. 

Sterling isn't priced for a rate cut any time soon so the week ahead's economic figures, beginning with Monday's November GDP number, will now garner increased attention from the market. Consensus is looking for a second consecutive 0% change in November, which would take the economy across the halfway point of the final quarter without it having grown at all. 

"We continue to see the economy contracting in November, with GDP shrinking by 0.1% m-o-m. The drop is a result of car factory shutdowns as well as a drop in services activity. Importantly, our quarterly nowcast models continue to show a weak Q4, with GDP coming in around -0.1%," says Sanjay Raja, an economist at Deutsche Bank. "Pay attention to the retail sales print. It should give us a first glimpse of activity in December, at least with regards to hard data."

Above: Other UK economic data due through this week along with results anticipated by market. Source: Netdania Markets.

Wednesday and Friday will also see inflation and retail sales data released although Deutsche Bank's Raja says figures out the following week will be more important for the BoE. Nonetheless, markets are looking for inflation to remain at 1.5% for December, below the 2% target, and for the more important core number to have remained at 1.7%.

Retail sales, an important indicator of consumer health, are expected to have risen 0.8% for December after falling -0.6% in November. Raja says retail sales should have recovered strongly from their earlier fall due to Black Friday and Cyber Monday promotions ahead of the festive period as well as that discounting could have increased footfall on the High Street. 

Another factor to watch out for in the week ahead is clues about what could be unveiled in the March budget. Last week attention turned to what scope HM Treasury might have to provide fiscal stimulus to the economy in the coming years, given the March 11 budget is drawing closer. Some including Deutsche Bank's Raja estimate there could be as much as £60 bn available for investment, which is equivalent to around 3% of GDP. 

Any government splurge could be taken positively by the Pound because it might lessen the need for rate cuts at the Bank of England. Pricing in the overnight-index-swap market implied on Friday a Bank Rate of 0.60% in May, which is below the current 0.75% level and above the 0.50% that would prevail after a typical 25 basis point cut.

That kind of positioning poses both upside and downside risks to Sterling.

Above: GBP/CAD rate reconnects with GB-CA interest rate differential, bringing relative economic performance into focus.

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The Canadian Dollar: What to Watch

The Canadian Dollar advanced against the Pound and U.S. Dollar Friday but still saw closed the week on a fractional loss against both, although the performance of the domestic economy relative to that of others will be the biggest determinant of its trajectory in the weeks and months ahead.

Canada's Dollar appeared to run out of steam after strong gains into New Year and as the December jobs report loomed over the currency, with implications for the outlook one way or the other. But Friday's jobs figures have already given relief to the Loonie and could yet cheer the Bank of Canada (BoC).

The economy created 35.2k new jobs last month, Statistics Canada said Friday, when markets were looking for only a 24.9k increase. What's more, the unemployment rate slumped from 5.9% to 5.6% in a move that reversed a substantial part of November's shock 40 basis point increase.

Local economists have cautioned against excessive optimism because the jobs market was not the only pocket of weakness revealed by recent figures. This is after Governor Stephen Poloz acknowledged in a fireside chat hosted by the Ontario Securities Commission Thursday that labour market growth has "slowed very recently," which is important because the BoC has identified households as one of the main sources of Canada's economic "resilience".

"Although the rebound in USDCAD this week should be viewed as purely a 'big dollar' move, the nagging risk factor that had the FX market's attention was Poloz's 'fireside chat' scheduled for Thursday. The risk was that Poloz would use that event to drop hints that December's CAD appreciation was unappreciated by the BoC. He did no such thing. Poloz instead delivered a cocktail of dovish and hawkish remarks that left interest rate expectations basically unchanged," says Greg Anderson, global head of FX strategy at BMO Capital Markets. "The passing of the upside event risk allowed USDCAD to drift gently lower." 

Above: USD/CAD rate chases U.S.-CA interest rate differential lower, bringing relative economic performance back into focus.

The only major release due from Canada in the week ahead is the BoC's latest Business Outlook Survey, which is due at 15:30 Monday and will be certain to garner attention from the market. Canada's Dollar is still the only major currency with an interest rate to rival that offered by the Federal Reserve, which means it's one of only a handful that investors can use to bet against the greenback without having to pay a costly interest rate differential.

That's a big part of why the Loonie is performing so strongly of late. It was the best performing major currency last year in substantial part because the BoC left its cash rate unchanged as others cut theirs throughout the year, but the only thing that was standing between the current 1.75% and the next level down was the jobs market, strong wage growth and an outperforming economy.

Markets will be watching Monday to see if the Governor and his colleagues are moving any closer to an interest rate cut. Pricing in the overnight-index-swap market implied on Friday, a June 06 cash rate of 1.66%, which is below the current 1.75% but substantially above the next level down of 1.5%. Those expectations imply more downside for the Loonie than they do upside because no major central bank is expected to raise rates this year and some are seen as likely to continue cutting their benchmarks.

"From the end of November CAD strengthened nearly 2.6% against the dollar until the start of the second week of January, only giving up some these gains over the last few days’ risk off period. Canadian core and headline inflation rates have been gradually moving higher above 2% over the last few months, providing some support to CAD. But growth in the Canadian economy has been lacklustre," says Fritz Louw, an analyst at MUFG. "We assume CAD under-performance this year after CAD was the top performing G10 currency last year, in part on global slowdown finally impacting Canada. A rate cut is not fully priced for this year leaving CAD vulnerable." 

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