Pound-Canadian Dollar Rate Comes Back from Brink as Loonie, EUR/USD Threaten EUR/CAD Upturn 

-GBP/CAD neutralises earlier bearish turn as Brexit risks shift.
-Brexit burden on GBP eases as trade talks enter critical stage.
-GBP/CAD establishes floor above 1.71, may return to 1.7287.
-EUR woe, USD/CAD outlook risks stifling EUR/CAD upturn.

Image © Bank of Canada

• GBP/CAD spot rate at time of writing: 1.7195
• Bank transfer rate (indicative guide): 1.6593-1.6714
• FX specialist providers (indicative guide): 1.6937-1.7040
• More information on FX specialist rates here

The Pound-to-Canadian Dollar rate may have established a new foothold above 1.71 amid a shifting balance of Brexit risks, giving it scope to edge higher over the coming days, although European troubles and an indecisive Loonie risk cutting short the nascent upturn in EUR/CAD. 

Caution about the prospect of a Brexit breakthrough resulting from this week’s trade talks between the UK and EU, if not the anticipation of one, has helped pull the Pound-to-Canadian Dollar rate further back from the brink of severe losses and could yet enable it to cement its nascent foothold above 1.71.

“There is certainly scope for the buying to continue but I have the view that the more contentious issues - like level the playing field - will require intervention from political leaders and that headlines will start to reflect more frustration as talks go on this week,” says the London FX dealing desk at J.P. Morgan in a morning commentary. “Canada certainly isn’t a place I want to be long as the market is still long CAD, USDCAD has a lower beta than other G10 pairs and virus cases have been on the rise in Canada without much being said about it. Still, I think we probably top out up towards 1.3500/50.”

So long as the main Sterling exchange rate GBP/USD is able to hold above the 1.27 level, as is anticipated by some technical analysts, and USD/CAD trades in line with the general market view the Pound-to-Canadian Dollar rate would continue to be found trading above the nearby 1.71 level.

There's some chance of the Pound-to-Canadian Dollar rate returning to 1.7287 over the coming days if the shifting Brexit landscape is able to keep Sterling on its current recovery trajectory while other risky currencies like the commodity-linked Canadian Dollar on the back foot. 

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

The U.S. Dollar has corrected higher in the last week and many analysts do still look for USD/CAD to advance up to 1.35, denoting a reduction of wagers against the greenback and lukewarm market appetite for the Canadian Dollar. 

"We still think that we can get upwards momentum on the USD leg into elections, and we look for USD/CAD to reach the 1.3500 area,” says Bipan Rai, North American head of FX strategy at CIBC Capital Markets. “Nominal yields along with the recovery in crude prices points to CAD strength on the crosses.”

This kind of outlook has implications for more than just Sterling, including for the Euro-to-Canadian Dollar rate which faces having its nascent turn higher curtailed around 1.5669 unless the EUR/USD rate is able to overcome its 21-day moving average just above 1.1780. 

“We had thought that the EUR’s gains through early September might be the start of a renewed upward phase of movement but the break out of the downward sloping channel (the “handle” of a broader, bullish “cup & handle” formation) has failed to flourish,” says Juan Manuel Herrera, a strategist at Scotiabank, referring to EUR/CAD. “The cross has pivoted around the 55-day MA that has acted as a magnet for neutral price action (see mid-year) previously. Intraday and daily trend strength signals have slipped into neutral. We expect more range trading in the short run.”

Above: USD/CAD shown at daily intervals. 

Some analysts are tipping EUR/USD for a decline to 1.15 in the coming weeks, which could result in EUR/CAD being pushed from 1.5650 on Tuesday to at least as far back as 1.5525. Reasons are mostly, though not solely technical.

“ECB president Lagarde has raised concerns over the European economic recovery. The sustained dent from the pandemic prevented corporations from taking new investment and hindered consumption activities. And she stressed that the ECB will implement more stimulus if the situation requires,” says Reo Liao, an analyst at IG, who sees risks of a fresh EUR/USD lurch lower. 

European Central Bank (ECB) concerns about the growth outlook and what a strong currency might mean for the Eurozone inflation outlook have curtailed this year’s rally in advance of a break above 1.20, while cultivating the impression in the market that any move above that level will simply serve to beget more monetary stimulus that could then undermine the currency. 

EUR/USD was still 8.3% above its mid-May range floor of 1.08 on Tuesday and some 2.1% above its late-July breakout level of 1.1450, while only 2.5% down from the 1.20 that’s perceived by some as a de facto ceiling for the ECB. 

This could mean that for investors, EUR/USD doesn’t need to rise much above the 1.17 level before a deteriorating risk-reward balance associated with holding the Euro incentivises profit-taking, which would likely weigh on EUR/CAD. 

“Benoit Couere of the ECB talked down the EUR strength via several comments on prolonging the QE program every time EUR/USD hit 1.20. In 2020, Phillip “you shall not pass” Lane has taken over that role and was quick to respond when EUR/USD hit 1.20,” says Andreas Steno Larsen, chief FX strategist at Nordea Markets. “We see a scope for a stronger USD over the coming 4-5 weeks but we hold a strong conviction in buying risk assets (higher EUR/USD, stronger EM, stronger NOK vs. SEK) after the election.”

Above: Euro-to-Canadian Dollar rate shown at daily intervals with EUR/USD in green and plotted on left axis.