Pound-Canadian Dollar Week Ahead: Uptrend Intact as Fundamentals Also Point Higher

- GBP/CAD charts point toward an extension of current rally.

- As coronavirus, CNY stock market fallout rattles investors. 

- Chinese economy nears standstill, hits commodity prices.

- Oil market woes, falling CNY can lift GBP/CAD, USD/CAD.

- Spread of infection in China, elsewhere, key for the CAD. 

- CA GDP beat overlooked, jobs data risks falling by wayside.

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- GBP/CAD Spot rate: 1.7472, up 1.66% last week

- Indicative bank rates for transfers: 1.6860-1.6983

- Transfer specialist indicative rates: 1.7210-1.7315  >> Find Out More About This Rate

The Pound was the best performing major currency last week and is tipped by technical analysts to advance on the Canadian Dollar over the coming days, although fundamental risks also favour more gains for Sterling.

Pound Sterling gained nearly 2% against the Canadian Dollar last week after a Bank of England (BoE) decision to leave rates at 0.75% in what turned out to be not nearly as close a call as markets had thought it would.

But Sterling's gains were partly the result of weakness in the Loonie, which was sold along with crude oil futures, other commodities and commodity currencies as markets priced-in a likely substantial hit to Chinese GDP for the first quarter. 

Risk-aversion could drive the Pound-to-Canadian Dollar rate higher again from Monday, especially as Chinese stock markets are due to open Sunday night following an extended New Year holiday. 

"While markets fret over the impact of the Wuhan virus, the CAD has little chance to recover. Commodity prices have been devastated. Crude oil (WTI) is 21% off the early January high while copper has dropped 12% over 12 consecutive days of losses – but both markets look oversold and risks have to be tilting back towards a consolidation at least, if not a rebound," says Sean Osborne, chief FX strategist at Scotiabank. " Much will hinge on how virus headlines unfold from here for the CAD."

Above: Pound-to-Canadian Dollar rate at 4-hour intervals, rising alongside USD/CNH rate.  

The scale of the investor response on Monday will be telling of the level of panic within China and if declines in major equity benchmarks are more severe than the 6-10% falls indicated by proxies for Chinese assets this last week, it may spook investors. The Peoples' Bank of China (PBOC) has said it will inject 1.2 trillion yuan (£130 billion) of cash into the financial system via reverse-repurchase operations in a bid to ease any 'liquidity' or cash shortages. 

The Pound-to-Canadian Dollar rate always closely matches the sum of GBP/USD over CAD/USD so can be characterised as a bit of a race between Sterling and the Loonie, against the U.S. greenback. And in any such race that takes place amid a deterioration of investor appetite for risk, the Pound can normally be expected to win because the Canadian Dollar has more of an exposure to risk-sensitive commodity prices than its British counterpart.  

"GBPCAD is showing tentative signs of technical life," says Juan Manuel Herrera, a Scotiabank colleague of Osborne. "The GBP has held above retracement support and the range base around 1.6920 that held up the cross through the turn of the year. Gains through the 40-day MA and the firm weekly close through last Friday suggest that the pound is poised to rally again."

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

China's National Health Commission declared on Sunday that confirmed cases of coronavirus infections rose from 4,515 at midnight on January 27, to 14,380 by midnight on February 01. And the number of "severe cases" has risen from 917 on January 27, to 2,110 this weekend while the number of declared fatalities has increased from 106 to 304. There are now 19,544 suspected cases, up from 6,973 at the beginning of last week.

Coronavirus has spread rapidly from the province of Hubei last weekend, to all 31 provinces by mid-week and the numbers of cases that have actually been tracked and declared by the government have risen by double-digit percentages each day. Sunday and Monday will be the first opportunities for Chinese investors to respond to last week's developments, which has brought the country to a standstill and threatens to cripple the economy. 

All of this could mean there's good support for a continued Pound-to-Canadian Dollar rate rally over the coming days, although fundamentals are not the only thing to be pointing the exchange rate higher because technical signals coming from the charts are also bullish too. 

"Shorter term trend signals are favourable and aligning again with still bullish longer term DMI oscillators. The minor stall seen over the past three days appears to reflect a minor (bullish) consolidation (GBP-bullish above 1.7250). We think the GBP should push higher (towards 1.77/1.78 again) while the cross holds above 1.71 from here," Herrera says.

Above: Pound-to-Canadian Dollar rate at daily intervals, rising alongside USD/CAD rate. 

Pound Sterling: What to Watch

The Pound outperformed last week after the BoE's decision to leave rates on hold, which insulated Sterling from the fallout over coronovirus, although such protection is far from guaranteed over the coming days.   

Last Thursday's BoE decision to leave Bank Rate unchanged at 0.75% has lifted short-term British bond yields in moves that could easily prove to be unsustainable, and any reversal of them could weigh on the Pound in a week that's devoid of major economic data releases from the UK.

The American two-year bond yield, which British yields tend to follow, fell notably last week and especially on Friday. Most other major economy yields also fell, leaving those of the UK government appearing incongruous. And there's plenty of reason for thinking that global yields will continue to fall in the week ahead, which could see Sterling and the London bond market playing catch-up, potentially resulting in losses for the Pound against less risky currencies although the Loonie is not one of the latter. 

Above: 2-year GB bond yield shown at hourly intervals, alongside U.S. 2-year yield (blue). 

Chinese investors will return to the market Sunday night after a week-long New Year holiday. They have not yet had an opportunity to respond to a significant increase in the numbers of infected last week, not to mention the fact that China's economy has all-but ground to a standstill.

Some Chinese cities have turned to ghost towns over the last week and with the virus now in all of China's provinces, there is a chance that a multi-week period of quarantine, or self-isolation, awaits the entire country. That would have significant, unprecedented consequences for the economy.

In a panicky market Pound Sterling can be expected to cede ground to the U.S. Dollar, Japanese Yen, Swiss Franc and potentially even the Euro. But it would likely to gain over riskier rivals like the Aussie, Kiwi and Canadian Dollars.

China's National Health Commission updates with its latest declarations at 02:00 each morning while the UK government updates at 14:00 each day.

These, as well as similar announcements from other governments around the world, will be the biggest drivers of markets in the week ahead.

However, the direction of China's Yuan will also be important for currencies this week and so too will the response of global investors to whatever happens in China's stock markets overnight.

Price action could expose a gap between the situation as it's been disclosed by the government, and Chinese peoples' perceptions of it. Proxies for Chinese assets have pointed to between a 6% and 10% fall in major equity benchmarks. A meaningfully larger decline could spook investors the world over.

The Canadian Dollar: What to Watch 

The Canadian Dollar was among the worst performing currencies last week as oil prices cratered and investors flocked toward so-called safe-havens, which is a trend that could continue over the coming days. 

GDP growth was 0.1% for November, Statistics Canada revealed Friday, suggesting the final quarter economy may not have struggled as much as investors had come to think. However, the Loonie was unable to capitalise on better-than-expected data due to its exposure to cratering commodity prices.

January's jobs data will be released on Friday at 13:30 London time although much like the GDP figures, it risks falling by the wayside for investors in a week that looks set to be dominated by developments in China and elsewhere. 

"The outbreak is disrupting China’s economy, and those disruptions will have, albeit temporary, spill-overs," says Nathan Janzen, a senior economist at RBC Capital Markets. "Concerns about fuel demand from China have pushed global oil prices lower, to around $52/bbl on a WTI basis versus closer to $60/bbl ahead of the outbreak. While that drop is expected to be temporary, it will presumably reduce revenue for the Canadian oil & gas sector in the near term. And the longer the disruptions to economic activity in China last, the greater the potential for temporary spill over into global supply chains."

Above: USD/CAD rate shown at daily intervals, alongside WTI crude oil futures price.

ICE futures suggest West Texas Intermediate crude oil prices fell by a whopping 4.82% last week and by 15.53% for January alone, with a large part of those declines reflecting investor fears about the likely impact on the Chinese and global economies from the new pneumonia-like coronavirus that's spread to all of China's 31 provinces and more than 20 countries elsewhere in the world. And declining oil prices are bad news for Canada.  

Governments around the world have evacuated citizens and staff from the city of Wuhan, the province of Hubei and increasingly the rest of China as the authorities in the worlds second largest economy implement increasingly draconian measures in order to contain the outbreak. Wuhan, the epicentre, is effectively closed to the outside world although the disruption is not limited to that city or even the province of Hubei. 

This threatens to a severe blow for the Chinese economy in the first-quarter and one that could be increasingly reflected in the value of China's currency relative to the Dollar, which is another negative omen for the Canadian Loonie.

Both the USD/CAD and GBP/CAD rates share a meaningful positive relationship with the USD/CNH pair, which some strategists are tipping for another rally above the key 7.0 rubicon. That would be sure to prompt further gains for the U.S. greenback and Pound Sterling relative to the Canadian Dollar. 

"Since the onshore yuan (CNY) stopped trading for the holiday, the dollar appreciated by a net of a little less than 1% against the offshore yuan (CNH). A catch-up move of roughly the same magnitude would bring the greenback toward CNY7.0. While the last time the dollar rose through that threshold, the US accused China of currency manipulation, this time is considerably different," says Marc Chandler, chief FX strategist at Bannockburn Global Forex. "This is the time when China could likely get away with manipulation if it wanted."

Above: USD/CAD rate shown at daily intervals, alongside USD/CNH rate.