Canadian Dollar Weakness Lifts GBP/CAD but Loonie Recovery Seen Ahead 

- USD/CAD turning lower and charts flag prospect of further falls.
- As oil prices rise, commodities gain stronger influence on CAD.
- USD/CAD falls & Brexit could undermine GBP/CAD up ahead. 

Image © Adobe Images

• GBP/CAD spot rate at time of writing: 1.7097
• Bank transfer rate (indicative guide): 1.6499-1.6618
• FX specialist providers (indicative guide): 1.6841-1.6943
• More information on FX specialist rates here

The Canadian Dollar underperformed on Friday, enabling GBP/CAD to rise although some analysts see the Loonie recovering before long which would risk sapping the wind from Sterling’s sails, especially if a Brexit breakthrough remains elusive and coronavirus restrictions continue to be tightened. 

Canada’s Dollar was down against all major currencies except the oil-exposed Norwegian Krone after WTI and Brent crude oil benchmarks declined almost one percent before paring losses in the noon session ahead of the North American open. All the while S&P 500 futures were inching higher.

With oil-benchmarks stabilising the Loonie was also able to catch a breather, giving it the appearance of immunity to July retail sales figures that surprised on the downside, with the all-important core sales number having fallen -0.4% when markets were looking for a 0.5% increase.

"Even if households tilted more spending toward services in July, the data continue to suggest that the pace of growth seen in June wasn't sustained early in Q3," says Royce Mendes, an economist at CIBC Capital Markets. 

Above: WTI crude oil price alongside CAD/USD (orange line, left axis).

July's +15.7% increase in sales was also revised lower to 15.5%, adding insult to injury, although a tentative recovery of the WTI crude oil price enabled the Loonie to overlook the retail report in the latest demonstration of an enhanced commodity price influence on the currency. 

USD/CAD was lifted 0.29% to 1.3188, having advanced across the 200-day moving-average at 1.3182, although analysts at Natixis say the Canadian currency is now more likely to turn the tables on a resurgent U.S. greenback than it is to cede any more ground to it. 

"Weak daily volatility is an obstacle to a strong rise of the pair. Under these conditions, a breakout above the resistances around 1.3252-1.3266 (upper band of daily Bollinger) should prove difficult, the pair being more likely to pull back towards the supports around 1.3075-1.3084 (daily parabolic), the last obstacle before 1.3024-1.3036 (lower band of daily Bollinger)," says Micaella Feldstein at Natixis. "A break below these last levels would intensify downward pressures.”

Feldstein says USD/CAD could fall to 1.2910 and then as low as 1.2807 if Loonie strength or U.S. Dollar weakness can prompt a break beneath 1.3024.

Above: USD/CAD rate at daily intervals with 200-day average in black and Fibonacci retracements of 2020 rally.

“Based on equities being the biggest market, the temptation is to say that equities (or the factors that drive equities) are driving USDCAD. The same holds for commodities. However, yesterday proved to be a natural experiment,” says Greg Anderson, CFA and global head of FX strategy at BMO Capital Markets. “On the rare day with oil and the CRB up by a decent amount and equities down by a decent amount, what did USDCAD do? The answer is that USDCAD drifted lower, with CAD gaining a modest 0.1% against the USD. To us, the key point is that CAD gained. That is a sign that commodity prices are back to being a slightly more important driver.”

Canada’s Dollar, like many other currencies, shadowing the S&P 500 in a what has been very much a fickle and sentiment driven market but this week has seen oil prices reasserting their influence on the currency. This is after a large drawdown of inventories monitored by the U.S. Energy Information Administration, which took the market by surprise on Wednesday, and as investors begin to contemplate the likely level of Organization of Petroleum Exporting Countries (OPEC) support for prices into year-end.

"Saudi energy minister Prince Abdulaziz bin Salman brought some excitement to oil markets yesterday when he warned speculators betting on lower prices," says Eric Bregar, head of FX strategy at Exchange Bank of Canada. "This morning’s weaker than expected July Canadian Retail Sales report was a non-event as usual."

Feldstein's USD/CAD outlook would likely be bad news for the Pound-to-Canadian Dollar rate, which has rebounded by 1.48% this week but is heavily influenced by the main Canadian exchange rate. A USD/CAD fall to 1.3024 would drag GBP/CAD back to 1.6931 if all other Sterling exchange rates held constant while a USD/CAD rate of 1.2807 could see Sterling trading around 1.6649 against the Canadian Dollar. 

“OPEC+ won’t say whether it will take further action to boost prices, but as mentioned yesterday, this will depend on the price, which largely will be a factor of sentiment based around demand,” says Neil Wilson, chief market analyst at Markets.com. “British shoppers are a robust lot. UK retail sales rose 0.8% and are now 4% ahead of February’s pre-pandemic levels.”

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

GBP/CAD declines implied by Natixis' outlook reflect only anticipated Canadian strength so the downside could grow if Brexit, the Bank of England (BoE) or the UK government's somewhat hysterical handling of a second coronavirus wave leads to widespread weakness in Sterling.

Pound Sterling had traded higher against most of its major rivals including the U.S. and Canadian Dollars through much of Friday’s session, potentially aided by a robust August retail sales report that may have made an eventual BoE shift to negative interest rates a bit less likely.

"GBP remains one of the most rate sensitive currencies in G10. We believe that the relative monetary policy stance favors further yield (both in real and nominal terms) compression against GBP," says Kamal Sharma, a strategist at BofA Global Research. "Following the recent GBP sell-off, we argued that Brexit complacency suggests further GBP downside and higher volatility."

The BoE warned Thursday that preparations are underway in London for exactly such a policy shift, briefly troubling the Pound, although Sterling's fate may have been sealed Friday after the UK government moved ahead with further controversial restrictions on life in the North of England. Sterling was subsequently seen in retreat from the U.S. Dollar and faltering against others following the government decision and amid mutterings in the tabloid press about a possible second ‘lockdown’ in the coming weeks. 

New 'cases' rose from 829 on July 01 to 3,991 for September 16, according to the government dashboard, but in that time the seven-day average number of deaths fell from 37.3 to 11.85 and total deaths reported for September 16 were just 6. More than a month after new daily 'cases' rose back above 1,000, the death rate had fallen below 0.1% and was still declining despite fatalities often exceeding 15% of new infections disclosed during the first wave.

The second wave has so-far lacked the lethality of the first yet restrictions on life and the economic recovery have continued to be tightened. These factors, along with the bearish USD/CAD outlook, all argue against a continuation of this week’s Pound-to-Canadian Dollar rate rebound.

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