Pound-to-Canadian-Dollar Rate Has "A Lot of Upside Momentum"

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The Pound-to-Canadian Dollar rate was on course for a fourth consecutive gain Tuesday with the North American currency remaining on the back foot as fading risk appetites weighed on commodities including oil, although some analysts say the exchange rate has scope to rise further.

Pound Sterling was an outperformer Tuesday although it scored one of its strongest gains over the Canadian Dollar as oil prices extended Monday’s punishing declines amid mounting concern in the market over the spread of coronavirus outside of China, with outbreaks having been confirmed in South Korea, Japan and Italy among others.

Italy has quarantined towns and villages in its Northern regions in an effort to halt the spread of the virus, the first sign in Europe of the same kind of disruption that's brought China's economy near to a standstill this year.

"The week has started off on a seriously risk-averse footing. European stocks are down sharply," says Ned Rumpeltin, European head of FX strategy at TD Securities. "FX markets are following suit. The USD is stronger against everything but the JPY across the spectrum of G10 and major EM currencies. Interestingly, we're also seeing the CHF a touch weaker against the USD (+0.2%) now that the virus has taken firm hold in Europe."

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

China’s numbers of new cases are in decline but its economy has been badly damaged by the disease after cotainment efforts turned cities into ghost towns.

This is bad news for the all non-safe-haven currencies although Canada’s Dollar is among the most exposed given that it has strong positive correlations with both oil prices as well as stock indices like the S&P 500. Investors had favoured the Canadian Dollar over others until recently owing to its high-yielding appeal although coronavirus concerns have the potential to be a gamechanger.

“The underlying implication of price action is GBP-bullish—another rally to follow a consolidation—but the GBP needs to hold support around the 1.70 line in order to keep the extension higher in play,” says Juan Manuel Herrera, a strategist at Scotiabank.

Earlier losses led Sterling's uptrend to almost fold in on itself last week when prices briefly tested the 1.70 support level flagged by Herrera, although souring risk appetites are a bullish influence on the Pound-to-Canadian Dollar rate.

“Longer run trend strength signals suggest the GBP retains a lot of upside momentum, even if shorter term signals are flat and favour more range trading for now. GBP gains through 1.7150 (40-day MA) are mildly constructive. Bullish above 1.7335/40,” Herrera says.

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

Sterling has trended higher since August 2019 although where it heads next will depend on the relative performance of the GBP/USD and CAD/USD rates, as GBP/CAD always closely matches the former divided over the latter.

So far Sterling has been resilient in the face of coronavirus concerns while the CAD/USD rate has been on the back foot to a greater degree given the implications for oil prices of the nascent coronavirus developments.

China's apparent slowdown has stoked fears for the global economy, sending investors flocking to the safety of the bond market and boosting safe-havens, while weighing on risk currencies.

And with Italy unable to identify“patient zero” the prospect of the virus spreading in Europe is now looming large over the global economic outlook while stock markets, which the Canadian Dollar tends to follow, are wobbling.

“USDCAD has not sufficiently absorbed the risks to CAD from both a widening coronavirus contagion and a weakening US and Canadian economy. I am astounded that oil prices have held up as well as they have, but if oil plays catchup with the news, new low prices may lie ahead there and feed some catchup downside in CAD relative to some of its peers,” says John Hardy, head of FX strategy at Saxo Bank. “We’re watching for the potential here that a new close above 1.3300+ highs of late leads to a significant extension higher.”

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