Pound-to-Canadian Dollar Rate Retreats from 2018 High but Loonie's Oil Woes to Push It Higher Again

- GBP/CAD retreats from 2018 high after hitting roadblock.

- Important technical level blocks GBP/CAD's path at 1.7933.

- Oil prices rebound amid OPEC chatter, hopes of stimulus.

- After Russia doesn't rule out return to supply talks with OPEC.

- But Saudi price war could weigh until May/June OPEC meeting.

- Coronavirus threat to global growth also an oil, CAD headwind.

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The Pound-to-Canadian Dollar rate retreated from 2018 highs Tuesday but the coronavirus threat to the global economy and prospect of a months-long oil price war could help it to retain an upside bias in the weeks ahead.

Sterling has gotten the better of a crumbling Loonie this week, helping the Pound-to-Canadian Dollar rate to rise through one notable resistance barrier on the charts this Monday and to test another, before a rebound in oil prices sent the exchange rate into retreat on Tuesday. 

WTI crude oil futures rose 12% after the Russian government spokesperson Dmitry Peskov was reported to have said the country does not rule out a return to supply talks with the Organization of Petroleum Exporting Countries (OPEC), although the next talks are not expected to take place before May at the earliest.

Russian Energy Minister Alexander Novak told reporters Tuesday that recent oil price volatility could continue for some months yet, a day after Russia’s decision not to endorse a supply reduction agreement led Saudi Arabia to effectively declare a price war which sent futures prices tumbling close to 30%. 

Oil price woes threaten more hardship for oil producing economies that will likely have to deal with their own coronavirus threat over the coming months. And Canada’s economy as well as Dollar could be among the hardest hit in another oil downturn, especially if the global economy goes south at the same time. 

“The Australian and Canadian dollars have moved relative to oil prices. Both correlate with oil even if the Canadian economy is more directly affected. Given oil prices, USD/CAD could easily rise to 1.40,"  says Kit Juckes, chief FX strategist at Societe Generale, who's warned of more oil losses ahead.

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

Societe Generale expects the price of oil, which is Canada’s largest export, will remain under pressure in the months ahead and is looking to see the USD/CAD rate rise back to 1.40 as a result.

That could be a boon for the Pound-to-Canadian Dollar rate, especially if the GBP/USD rate is able to hold the 1.30 level in the coming weeks because combining the latter with the former implies a GBP/CAD rate of 1.82.

The Pound-to-Canadian Dollar rate overcame the 1.75 handle as investors sold the Loonie en masse amid Monday’s oil price collapse. That level coincides with the 50% Fibonacci retracement of the June 2016 downtrend and had barred Sterling’s path higher in December although the British currency has since also tested by 61.8% retracement level of the same trend, located around 1.7933, but was in the process of correcting lower on Tuesday. 

Whether or not Sterling can keep the U.S. Dollar at bay will be key to if the GBP/CAD rate really can achieve the 1.82 handle in the months ahead, although forecasts from one domestic lender suggest that will be unlikely. RBC Capital Markets downgraded its 2020 Canadian Dollar forecasts Tuesday and now looks for USD/CAD to hit 1.40 by the end of June, although it’s also forecasting the Pound will fall to 1.26 against the U.S. Dollar which implies a GBP/CAD rate of 1.7642 at the end of June. 

Above: Pound-to-Canadian Dollar rate at weekly intervals. Overcomes 50% retracement of 2016 trend an tests 61.8%.

“The upcoming federal budget is likely to contain some fiscal stimulus that would be welcomed by the BoC (a relief program directed at individuals quarantined by COVID-19 while some support measures could also be introduced for businesses), but it should not preempt the BoC from cutting again in April. This should maintain the weaker backdrop for CAD and push USD/CAD toward 1.4000 through mid-year,” says Adam Cole, chief FX strategist at RBC Capital Markets. “Our 2020 growth forecast has been downgraded to 1.0% (previously 1.4%) and this should keep CAD under pressure for the balance of 2020.” 

It’s unclear if  Sterling will be able to make it across the 1.7933 level that barred its path Monday but 1.75 has now been decisively overcome and could offer technical support to the exchange rate up ahead. And Canada’s Dollar is arguably facing greater headwinds than its British counterpart for the time being, which could mean the Pound-to-Canadian Dollar rate retains an upside bias in the weeks ahead even if it doesn’t make it as far as 1.82 or even 1.79. 

What matters most for the outlook are developments around the oil price and the spread of coronavirus in North America and Europe, as well as the extent to which economies are disrupted by efforts to contain the viral pneumonia. Investors are acutely aware of the risks posed by containment strategies now that Italy has replicated the draconian ‘lockdown’ policy that brought vast swathes of China to a standstill in January and February. 

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

Italian citizens must avoid unnecessary travel while schools, universities and some other are to remain closed until at least April 03 as the government seeks to contain an outbreak that’s infected nearly 10,000 people in the last month and has claimed the lives of more than 5% of sufferers. The virus is now in more than half the world’s countries including its most and least developed, with Italy the largest hotspot outside of China’s Hubei province. 

The likely adverse effects of the Italian government move were lost on investors Tuesday as markets calmed ahead of a press conference expected to be held by President Donald Trump later in the day in which details of a “very substantial relief” package for companies and households are expected to be unveiled.

“The USD should stabilize a bit here (see above). Coronavirus and oil price wars remain at the forefront of investor concerns, and we expect continued volatility in a headline driven market. Trump is expected to deliver a coronavirus stimulus package of some sort today,” says Bipan Rai, North American head of FX strategy at CIBC Capital Markets. “USD/CAD is off highs not seen since 2017 as oil prices rebound to 33.50. With Aramco planning to supply 12.3mb/d in April (above capacity), we suspect that oil prices will remain lower for longer. This should continue to bolster pressure on USD/CAD to the upside, with 1.3700 as the near term resistance level.”