Pound-Canadian Dollar Rate Unravels as UK Economic Woe Weigh On Sterling

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The Pound-to-Canadian Dollar rate unravelled further on Tuesday after poor May GDP data stoked concern for the UK's recovery prospects, although some forecasters are warning of a further poor performance ahead. 

Sterling was wallowing at the bottom of the major currency barrel on Tuesday, ensuring the Pound-to-Canadian Dollar rate unravelled even as the Loonie itself underperformed a majority of comparable rivals.

The Pound was beating a retreat from the Canadian Dollar after Office for National Statistics data showed the economy barely stirring in May from the depths of contraction plumbed the prior month, with GDP having risen a meagre 1.8% after a revised -20.3% contraction in April. 

"The data has thrown quite a bit of cold water on those looking for a strong UK rebound - some MPC members included (Haldane in particular). Unsurprisingly, GBP has underperformed its G10 peers this morning. With cable still dominated by global factors, we prefer to look at EURGBP as the best avenue to express a bearish sterling view right now," says Ned Rumpeltin, European head of FX strategy at TD Securities. 

Consensus had looked for a 5.5% rebound from the UK's services heavy economy so the actual number came as a disappointment that was enough to tip Sterling lower against all major rivals. 

Above: Pound-to-Canadian Dollar rate shown at daily intervals with 21, 55 (red) and 200-day (green) moving-averages.

The Pound-to-Canadian Dollar rate was approaching the 1.70 handle on Tuesday after having entered the new week close to 1.72, although losses were constrained by ongoing underperformance in the Canadian currency. 

"The pound looks to have stalled above the 200-day MA but right on the early June high, just below 1.72. Intraday price action looks more GBP-negative at this point (there is a long way to go over the balance of the session but a possible bearish “engulfing line” is developing). The cross may drift back to the 1.70 area; if this support point holds, the GBP may be able to make another push higher. Weakness below 1.70 leaves the 1.68 zone exposed again," says Juan Manuel Herrera, a strategist at Scotiabank.

The Loonie has underperformed since a second wave of coronavirus infections began sweeping across the U.S., Canada's next door neighbour, leading it to fall against all major rivals in the last month. 

Canadian losses have enabled Sterling to recover its footing above the 1.70 handle although this was being tested on Tuesday as Prime Minister Boris Johnson's decision to bank China's Huawei from Britain's 5G network was said to have incited further selling. 

But new forecasts suggest the Pound-to-Canadian Dollar rate is headed for another fall below 1.70 where it's seen remaining through year-end. 

"We expect the BoC to keep the overnight rate at 0.25% on 15 July and to stand ready to step QE up if needed," says Ben Randol, a strategist at BofA Global Research, who forecasts a GBP/CAD rate of 1.6851 for the third quarter and 1.6942 by year-end. "An upbeat tone may well reinforce prevailing trends lower in USD/CAD (largely a reflection of buoyant risk assets, weaker USD and a recovery in oil) and the US-CA 10-year bond differential (largely a reflection of worsening relative US COVID-19 dynamics)." 

Above: GBP/USD rate at daily intervals with CAD/USD (orange line) and 21, 55 (red) & 200-day (green) moving-averages.

Both Pound Sterling and the Canadian Dollar have been taking cues from the trajectory of stock markets in recent months, notably the S&P 500 but the next major risk events for the Pound-to-Canadian Dollar rate are Wednesday's Bank of Canada (BoC) meeting and this week's update from Brexit negotiators, which could come either on Thursday or Friday. BofA's Randol sees the BoC supporting the Loonie in the final half of the week, which puts the onus on the Brexit talks to avert further declines in GBP/CAD.

Brexit negotiations remain deadlocked although there is a chance that some form of progress is made in "accelerated" talks that run to month-end, more so given reports claiming the EU has softened some of its demands in relation to fishing rights and oversight of the European Court of Justice. The details of these possible compromises are not known although if they lead to movement in the talks over the coming weeks if could put a floor under the Pound.

A Brexit breakthrough could drive GBP/USD to 1.31 or above in a steady market for risk assets, which would lift the Pound-to-Canadian Dollar rate to 1.7947 if accompanied by the USD/CAD rate of 1.37 envisaged by BofA for the third quarter. This is because GBP/CAD is effectively an amalgamation of USD/CAD and GBP/USD. However, the bank itself has a bearish outlook GBP/USD and is looking for it to fall to 1.23 by the end of September and 1.21 by the time the curtain closes on 2020. 

"A higher oil price assumption has prompted us to significantly moderate our bullish USD/CAD forecast. We now expect 1.37/3Q and 1.40/4Q, moderating back to 1.35 later in 1H 2021. A poor and deteriorating CAD, structural supply/demand balance and low FX risk premium makes us persistent buyers on dips over the medium-term," Randol says. "Over the shorter-term, the combination of continued risk asset buoyancy and reversal in US outperformance could see a retest of 1.33, while a market correction could catalyze a rally into the upper 1.30s."   

Above: Pound-to-Canadian Dollar rate shown at weekly intervals with 21, 55 (red) and 200-week (green) moving-averages.