USD/CAD Tipped Higher at TD Securities as Canadian Dollar Sales Offer Scope for GBP/CAD Recovery

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• GBP/CAD spot rate at time of writing: 1.7158
• Bank transfer rate (indicative guide): 1.6501-1.6620
• FX specialist providers (indicative guide): 1.6843-1.6945
• More information on FX specialist rates here 

The Canadian Dollar attempted to stabilise against other major currencies on Friday but is now rated as a sell by TD Securities due to concerns about valuation and the stock markets, which could offer the Pound-to-Canadian Dollar rate a chance of recovering from recent losses. 

Canada's Dollar gave a resilient account of itself Friday as stock markets declined in Europe and the U.S. Dollar stabilised tentatively ahead of the weekend, while investors remained transfixed on the race for the White House and a seemingly diminishing shot at re-election for President Donald Trump.

Trump's lead in key swing states including Pennsylvania was said to be slimming ahead of the weekend while opposition candidate Joe Biden was growing his in others, although the incumbent has continued to cite supposed irregularities when making allegations of electoral fraud and has confirmed an intention to contest some results.

The main Canadian exchange rate USD/CAD edged lower, denoting a tepid recovery of the Loonie that also put the Pound-to-Canadian Dollar rate on the defensive after having knocked Sterling back from the week's highs near 1.72.

However, uncertainty over the outcome of the U.S. vote and potential for civil unrest, as well as prospect of a divided Congress, have got some analysts doubting that stock markets will be able to sustain their glass-half-full view of the current situation, with possible implications for USD/CAD.

"CAD has the most to lose in this environment, especially if elevated election uncertainty triggers a drawdown in risk sentiment," says Mark McCormick, global head of FX strategy at TD Securities. Our two-factor framework that tracks global growth expectations and risk sentiment still points to 1.34. USDCAD's beta to risk sentiment is rising too. Against that, CAD's rich on our dashboard, increasing its vulnerabilities if the USD starts to recover from the repricing of the global reflation trade.

Above: USD/CAD shown at daily intervals alongside S&P 500 index futures (yellow line, left axis). 

TD Securities looks for USD/CAD to turn higher with the broader U.S. Dollar as the stock markets turn lower over the coming days, which is something that may also help to lift the Pound-to-Canadian Dollar rate again. 

McCormick says the Canadian and New Zealand Dollars are the most overvalued currencies in the G10 universe, and that the Loonie would be likely to suffer declines if stock markets happen to unwind some of the high single digit gains wracked up this week. That would likely put a floor under the Pound-to-Canadian Dollar rate, given that Sterling currently has a lesser, although still noteworthy, sensitivity to shifts in investor risk appetite. 

This difference in sensitivity to the path trodden by stock markets and the U.S. Dollar has seen USD/CAD and GBP/CAD moving mostly in lockstep since early September, which could mean that if USD/CAD is to rise in line with TD Securities' expectations, Sterling may also be in with a shot at recovery. There are however, many other factors that influence the path of exchange rates while the Pound has a number of unique risks attached to it, like Brexit and a renewed, coronavirus-inspired 'lockdown' of the UK.

"We enter one new model portfolio update to buy USDCAD. While the market has focused on the positive impacts of a possible split government, we look for heightened two-way risks and elevated uncertainty in the weeks ahead," McCormick says. "CAD's rich on our dashboard, increasing its vulnerabilities if the USD starts to recover." 

The Loonie was underperforming as the Pound-to-Canadian Dollar rate just about clung to an intraday gain, with both fixated on incoming results from a handful of U.S. states that are yet to confirm the outcome of Tuesday's presidential election. But TD Securities tips USD/CAD for a rally up to 1.3550 over the coming weeks, which would lift GBP/CAD as far as 1.7615 in the event that GBP/USD remained around this week's average of 1.30.

Above: Pound-to-Canadian Dollar rate shown at daily intervals alongside USD/CAD (yellow line, left axis). 

Much depends on the eventual U.S. election outcome however, which could take days if-not weeks to confirm, given its implications for the U.S. Dollar. On Thursday the opposition candidate Joe Biden by financial markets to be the winner, although results from Arizona and a handful of other swing states still carried the risk of a Trumpian boost to the U.S. Dollar that would be almost certain to lift USD/CAD and, potentially lift GBP/CAD. 

"While there has been an extension in risk, USD/CAD remains near unchanged relative to its high beta counterparts as investors prefer to express the USD-lower trade elsewhere. Expect near term support/resistance at 1.3080/1.3300 respectively," says Bipan Rai, North American head of FX strategy at CIBC Capital Markets. "GBP/USD rose after the BoE meeting as a lot of dovishness was already priced in, and shorts unwound."

The so-far uncertain and somewhat contested result has the potential to leave global markets and the economy in a sweet spot where trade tensions are lessened while stock markets continue to be buoyed by a divided Congress. With the Senate chamber likely held by Republicans, U.S. lawmakers could prevent President Trump's 2018 tax cuts from being reversed and restrain the Democratic Party impulse on government spending programmes and climate change.

The consensus view in the market had been that a large Democrat spending programme would lead to more Federal Reserve (Fed) money creation and resulting declines for the greenback, while the economy was expected to be left grappling with a reversal of President Donald Trump's 2018 tax cuts and regulatory revolution in the name of containing the rate of climate change. But with a Republican held Senate all of these are potentially off the agenda.

Such an environment could see both USD/CAD and GBP/CAD stabilising near the week's lows, if not recovering from them over the coming days.

Above: Pound-to-Canadian Dollar rate shown at weekly intervals alongside USD/CAD (yellow line, left axis).