Pound-to-Canadian Dollar Week Ahead: Supported as UK Reopens but CAD Strength, Brexit Talks Loom
- Written by: James Skinner
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- GBP/CAD finds support after 4th week of losses takes it below 1.70.
- Could bounce early this week but struggle to get above 1.7145 level.
- Risk rally benefits CAD more than GBP as BoC and Brexit talks loom.
- BoC seen as a non-event for CAD but Brexit talks significant for GBP.
Image © Bank of Canada, Reproduced Under CC Licensing
- GBP/CAD spot at time of writing: 1.6993
- Bank transfer rates (indicative): 1.6398-1.6517
- FX specialist rates (indicative): 1.6738-1.6840 >> More information
The Pound-to-Canadian Dollar rate might receive a bid early in the new week but Brexit headwinds and the relative appeal of the Loonie could weigh on the exchange rate as the days draw on, leading to fresh losses for Sterling.
Pound Sterling has ceded ground to the Canadian Dollar for four consecutive weeks, leading to losses of -4% level for the May month and taking the exchange rate down through a cluster of key technical support levels last week.
The Pound-to-Canadian Dollar rate fell through its 200-day moving average at 1.7036, the 1.70 support level and the 50% Fibonacci retracement of the 2019 uptrend last week. It also spent a brief period of time trading below the 1.69 handle before recovering it in time for the weekend.
But Sterling was steadying Friday and might even receive a boost on Monday if investors welcome efforts to reopen the UK economy over the next fortnight and gains for GBP/USD are able to offset any further decline in USD/CAD. What matters most for the Pound-to-Canadian Dollar rate is price action in GBP/USD and USD/CAD, given that it's an amalgamation of the latter two, with the relative pace of gains and losses in those two driving the moves in GBP/CAD.
The lockdown exit will close the gap between Britain and other developed world countries after weeks of it lagging behind, but the going could get tougher for Sterling as the divergent fortunes of the two currencies are laid bare later this week. But USD/CAD is tipped for more losses while it's far from certain that GBP/USD will be able to keep pace as the week progresses.
The fourth and final round of Brexit talks gets underway this week and could constrain Sterling, which would be a burden for the Pound-to-Canadian Dollar rate if investors remain in an upbeat mood and continue to chase stock markets higher, as the later would benefit the Loonie and weigh on USD/CAD.
"It seems that short term CAD trends remain highly contingent on the broader risk tone, judging by the strong, positive correlation between the CAD and US equity trends," says Shaun Osborne, chief FX strategist at Scotiabank. "Our week ahead model suggests modest downside potential in USCAD over the next five trading days – to the mid-1.37s and anticipates a trading range of 1.3575-1.3940....We look for firm USD resistance at 1.3850/60 now." 
Above: Pound-to-Canadian Dollar rate at daily intervals. Cedes 50% Fibonacci of August trend & 200-day moving-average.
Canada's currency has benefitted from a continued recovery in the stock and oil markets that it's closely correlated with, but also the liquidation of earlier speculative wagers on further increases in USD/CAD, the exiting of which requires investors to sell USD/CAD. These trends have got Scotiabank eyeing a move down to around 1.3750, and potentially as far as 1.3575.
Such USD/CAD targets put a lot of onus on GBP/USD to keep the vert further losses against the Canadian Dollar because in the unlikely event that GBP/USD remained around 1.2348 throughout the week the aforementioned levels imply a Pound-to-Canadian Dollar rate range of between 1.6980 and 1.6763. However, the GBP/USD rate is very unlikely to just sit still while some influential analysts see it moving higher over the coming days.
"Sterling's by far the worst of the major currencies this month and while that opens the way for month-end short-covering, Andrew Bailey reasserts the MPC's readiness to act further in the Guardian. He's keeping the negative rate debate alive," says Kit Juckes, chief FX strategist at Societe Generale. "Sterling's only support is the size of the short positions and thin month-end markets magnify that support, but that doesn't change the fundamentals."
A GBP/USD rate that rises to 1.2468 over the coming days, which some see it as likely to, would imply a Pound-to-Canadian Dollar range of between 1.6926 and 1.7145 if the USD/CAD rate was trading between 1.3575 and 1.3750. However, Brexit headwinds and a Bank of England (BoE) that's increasingly contemplating the merits of the a negative interest rate policy mean the risks are very much leaning toward a lower GBP/USD rate over the coming weeks.
That lower GBP/USD rate, if also accompanied by a lower USD/CAD rate, could see things get ugly for the Pound-to-Canadian Dollar rate. When those two diverge it can lead to large moves in the Pound-to-Canadian Dollar rate. A GBP/USD rate that falls back to 1.20 would put the Pound-to-Canadian Dollar rate down at 1.65 if accompanied by a USD/CAD rate of 1.3750 and at 1.62 if accompanied by a USD/CAD rate of 1.35.
"GBPUSD has shown some resiliency in the past two weeks, blunting downward pressure that had started to emerge through the middle of May after the GBP broke under 1.2250—the neckline of the 1.2650 double top. While the GBP has nudged higher, and even traded back above 1.2250 briefly this week, we still think the broader technical picture remains bearish," says Jaun Manuel Herrera, a Scotiabank colleague of Osborne's. "Trend momentum has stalled on the daily oscillators but longer run DMI signals remain aligned bearishly for the GBP. We still think sub -1.20 levels are a risk in the next few weeks."
Above: USD/CAD alongside S&P 500 (Orange) and WTI crude oil futures price (black line).
"We expect a further USD/CAD dip toward 1.35-1.36 near-term on [hedge fund] position squaring, but we think these levels would set up for a buying opportunity as we expect the medium-term adjustment to 1.50 to resume," says Ben Randol at BofA Global Research. "We expect the BoC to leave the policy rate at the current level for many quarters and believe the chance of a negative rate is low. We do not expect meaningful asset price responses."
Highlights of the week ahead on the Canadian side include the first Bank of Canada (BoC) policy decision under new Governor Tiff Macklem and employment data for May. Consensus is for the cash rate to be left unchanged at 0.25% and for the BoC's coronavirus-related quantitative easing programme to remain unaltered which means, absent surprises, the decision might not have much impact on the Canadian Dollar.
"The CAD has been a tricky nut in recent sessions and we don't expect this BOC meeting will crack it eithe," says Mazen Issa, a strategist at TD Securities. "CAD - like much of the G10FX complex - has essentially been an equity trade with some deference to broad USD variation. In this regard, the recent break below 1.3850 technical support is largely a reflection of these two factors we think, rather than an abrupt adoption of CAD bullishness."
Employment data could be overlooked too given that markets know already the rough size of the historic hole opened up in the economy and labour market by 'lockdown' measures used to contain the coronavirus, which drove a -7.2% month-on-month fall in Canadian GDP during March and lifted Canadian unemployment to 13% in April, according to Statistics Canada data.
Those numbers might not improve for months yet and it's progress in repairing the damage that investors really care about.
"The recovery remains highly uncertain and the BoC’s best case of a nearly full rebound in economic activity by the end of this year still looks quite ambitious. The speed and scale of the recovery in the second half of 2020 will be an important factor in the next phase of the BoC’s monetary policy response," says Nathan Janzen, a senior economist at RBC Capital Markets.
Above: Pound-to-Canadian Dollar rate at weekly intervals Resting on 200-week moving-average.
