Canadian Dollar Draws Algorithmic Seller Ahead of Central Bank Shindig while GBP/CAD Recovers

File image of the Bank of Canada Governor Tiff Macklem. Webpage Image © Adobe Stock

• GBP/CAD spot rate at time of writing: 1.7326
• Bank transfer rate (indicative guide): 1.6729-1.6851
• FX specialist providers (indicative guide): 1.7076-1.7180
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The Canadian Dollar advancd on the greenback and some other major currencies Tuesday but ceded ground to an outperforming Sterling ahead of this year's central bank shindig in Jackson Hole, although a Credit Agricole CIB financial model has suggested selling the Loonie. 

Canada's Dollar was higher against the U.S. Dollar, Yen and antipodean commodity currencies Tuesday but was found in retreat from European currencies like Sterling and the Euro amid robust risk appetite that was bolstered overnight when  U.S. Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer said "Both sides see progress and are committed to taking the steps necessary to ensure the success of" January's phase one deal that halted the trade war between the U.S. and China.

Investors also celebrated a U.S. regulatory endorsement for the use of blood plasma from recovered coronavirus patients as a treatment for the sickest of sufferers after the White House hailed it as an effective treatment that could be used to reduce the pneumonia-inducing disease's lethality while the search for a vaccine goes on. Stock markets hit new highs in the U.S., oil prices climbed and the Canadian Dollar drew support against some currencies although a Credit Agricole model has advocated selling it. 

"USD/CAD has become significantly undervalued," says David Forrester, a strategist at Credit Agricole CIB. "The FAST FX model has entered into a long USD/CAD trade with a stop-loss of -2.02% and take profit level of 1.3335. Stronger oil prices and global equities led to a lowering in USD/CAD’s estimated fair value from 1.3366 to 1.3335 last week. The spot exchange rate declined faster than its fair value, however, which caused it to become undervalued." 

Above: USD/CAD shown at daily intervals alongside Dollar Index (black line, left axis).

The Canadian Dollar was a straggler on Tuesday but had been a relative outperformer in the last week having closed higher for the period on Friday against all major currencies except for the U.S. Dollar. USD/CAD edged higher last week amid a last minute retracement lower by the Euro and resulting bounce for the U.S. Dollar Index, which the Loonie has tended to follow quite closely since the coronavirus came along. 

Credit Agricole's Forrester says this week's Canadian GDP data and central bank speeches from Jackson Hole are key to if the FastFX model recommendation pays off. June and second quarter GDP data are out at 13:30 on Friday although before then Federal Reserve Chairman Jerome Powell will deliver a landmark speech on monetary policy at 14:10 Thursday, while Bank of Canada Governor Tiff Macklem takes to the stage at 16:15.

"While funds holds above the 1.3130/50 range which has figured as the low point of the trading band over the past week, the prospect of real downside progress towards 1.2950/1.30 is limited. We think this is where the market is heading from a technical point of view but it may take a little time to get there. We spot short term resistance at 1.3225/30. We are bearish on the technical outlook for USDCAD while the USD remains below 1.3300/05 (weekly bear trend). A weekly close below 1.3170 should add to downside momentum on the USD," says Shaun Osborne, chief FX strategist at Scotiabank. 

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

Bank of England Governor Andrew Bailey will also speak Friday at 14:05. Markets will scrutinise the speeches for clues on when any tweaks to monetary policy can be expected as well as for hints on what shape such changes might take. Investors may also be sensitive to remarks on the long-term policy implications of the coronavirus, which has lifted debt-to-gdp ratios sharply and seen interest rates as well as bond yields pinned to floor around the world.

Before then the Canadian Dollar, Pound and other currencies could continue to be governed by the international mood and its implications for all assets as well as new details relating to things like fiscal support for households in the U.S., the U.S.-China relationship, Brexit and economic data relating to the third quarter. In this time a number of analysts look for GBP/USD and USD/CAD to remain within recent ranges, which implies a continued sideways path spanning the gap between 1.70 and 1.74 for GBP/CAD. 

"The loonie continues to be driven by macro news. We retain our view that USD/CAD will trade within the 1.30-1.35 range and that risks are more skewed to a temporary break below," says Bipan Rai, North American head of FX strategy CIBC Capital Markets. "GBP is growing a bit more resilient to Brexit risks. This comes as several media outlets are reporting that Barnier told other EU members that the UK’s blueprint for a free-trade agreement (tabled last week) was unacceptable. For GBP/USD, price action remains within the 1.3000-1.3250 range for now."