Canadian Dollar Moves Up in World and Sterling Down as GBP/CAD Rate Rises in Risk-on Rally 

- GBP/CAD advances amid risk rally in sign that GBP's star has faded.
- As investors shake off Chinese sabre rattling, eye economic recovery.
- But U.S.-China tensions and Europe's June powder keg linger as risks.
- GBP/CAD may suffer if risk-off turn mixes with more homegrown woes.

Image © Pound Sterling Live

• GBP/CAD spot at time of writing: 1.7051
• Bank transfer rates (indicative): 1.6476-1.6596
• FX specialist rates (indicative): 1.6818-1.6920 >> More information

The Pound-to-Canadian Dollar rate rose Tuesday amid a strong rally in risk assets from stock markets to commodities, an unusual pattern of price action that suggests Sterling's star might've faded since it contracted the coronavirus and enabled the Loonie to move higher in the pecking order of major currencies.

Pound Sterling joined a rally that left no proxy for risk appetite untouched as investors appeared to look past the coronavirus to trade the positive implications of a global economic recovery that was bolstered on multiple fronts this week. 

Countries including South Africa, Japan, the U.S. and even the UK have either eased 'lockdown' restrictions this week or set out plans to do so, offering a further glimpse of what might eventually resemble economic normality. 

"Optimism is in the air as economies reopen and companies make progress toward a coronavirus vaccine. The resulting improvement in risk appetite weighed on the safer greenback which slipped broadly, hitting two-week lows against sterling and its weakest in more than two months versus the Canadian dollar," says Joe Manimbo, an analyst at Western Union Business Solutions.

The safe-haven U.S. Dollar was bleeding lower Tuesday and in a universal way, enabling both the Pound and Canadian Dollar to advance against the greenback although it was the Loonie that scored highest in that particular rebound, leading to a small intraday gain for the Pound-to-Canadian Dollar rate. 

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

"London and New York traders are buying risk assets hand over fist this morning as they return from their long weekends and, while the continued easing of coronavirus lockdown restrictions are being cited as the major reason, we think this has more to do with market participants throwing in the towel on “risk-off” bets placed during last Thursday/Friday’s bout of negative US/China headlines," says Eric Bregar, head of FX strategy at Exchange Bank of Canada.

Price action came despite Chinese sabre rattling suggesting it's bolstering its preparedness for a military conflict, effectively doubling down on its pushback against calls for an international inquiry into the origins and handling of the coronavirus that's currently thought to have first escaped its borders in January. 

This might've been expected by investors given that China is in the final leg of the National People's Congress meeting for 2020, although reports claiming Chinese President Xi Jingping has told the military to increase its training and war preparations underline the lingering risk to sentiment as well as currencies like the Pound and Canadian Dollar.

Beijing's attempt to give mainland security services a greater role in the policing of Hong Kong reignited pro-democracy protests their at the weekend and has already drawn U.S. threats of sanctions against China as well as the city itself if the 'draft decision' of China's legislature becomes law. 

Above: CAD/USD rate at daily intervals alongside GBP/USD rate (black line).

Exchange Bank of Canada's Bregar notes Tuesday's attempt by Carrie Lam to reassure Hong Kongers over the legislation and the absence of U.S. retaliation thus far as being big factors behind nascent price action. London and New York's return from a holiday weekend may also have been at play, given the two account for more than half of daily volume in the FX market.

"Price action puts risk sentiment and growth expectations on different sides of the fence. The focus for risk markets has been the exit from lockdowns, the extraordinary stimulus backstop coupled with little focus on the renewed tit-for-tat bickering between the US and China," says Mark McCormick, global head of FX strategy at TD Securities. "We believe the USD makes another leg higher, especially against European currencies like EUR and GBP this quarter."

Risk assets rallied Tuesday and concerns about U.S.-China relations were cast aside but the June month is shaping up to be a bit of a powder keg for at least the Pound and Euro, given that it'll see national leaders confront some of the thorniest issues to have stymied progress on Brexit and European integration for years, with potentially adverse consequences for both currencies no matter the mood elsewhere in the markets. 

This is important for the Pound-to-Canadian Dollar rate and more so after Tuesday's price action saw it rise in a risk hungry market that would typically have favoured Canada's oil-sensitive currency. But investors' distinction between the Pound and riskier commodity currencies, especially the Loonie, has lessened since the coronavirus came along. 

Above: GBP/CAD at daily intervals with Fibonacci retracements of March-to-May rebound. 200-day average in orange.

Historically, Sterling has ceded ground to the Canadian, Australian and New Zealand Dollars as well as all smaller European currencies, with the exception of the safe-haven Swiss Franc, on the market's good days. That pattern still holds on most except for in the case of the Canadian Dollar, which has enjoyed support of late from rising stock markets, recovering oil prices and a lesser direct link with China than is the case for the Aussie and Kiwi.

There are many potential explanations for the change but what might be more important for Canadian Dollar buyers is the risk that this new and perhaps temporary paradigm poses to the cluster of support levels near 1.70, particularly in the event that a risk-off shift in markets coincides with more homegrown weakness in Sterling in the days and weeks ahead, perhaps once into June.

Recent price action has helped Sterling extend its time spent resting on a cluster of nearby technical supports including the 200-day moving average at 1.7028, the round number at 1.70 just below and the 50% Fibonacci retracement of the July 2019 uptrend at 1.6967. These are notable support levels that would require either a step-up in GBP/USD weakness, or marked increase in USD/CAD strength in order to break. GBP/CAD is an amalgamation of GBP/USD and USD/CAD.

"Trend signals are mixed across a range of timeframes, which reduces our confidence about making a high conviction, directional call at this point. We think downside risks are building for the GBP but we will need to see more evidence of softness persisting to have a stronger view of directional risks. We think the upper 1.69 area will be important in the near term in determining how far the GBP slippage extends," says Juan Manuel Herrera, a strategist at Scotiabank.  

Above: Pound-to-Canadian Dollar rate at weekly intervals with Fibonacci retracements of post-referendum fall.