Pound-Canadian Dollar Forecast: Brexit Woe Threatens Support at 1.70 as BoC Decision Looms

- GBP/CAD facing losses as Brexit standoff threatens 1.70 support level.
- While BoC struggles to avoid improved outlook for Canadian economy.
- CAD strength curtails GBP/CAD's recovery potential on a surprise deal. 

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• GBP/CAD spot rate at time of writing: 1.7180
• Bank transfer rate (indicative guide): 1.6579-1.6693
• FX specialist providers (indicative guide): 1.6916-1.7054
• More information on FX specialist rates here 

The Pound-to-Canadian Dollar exchange rate suffered a setback last week when Sterling was outperformed by a resurgent Loonie that has crimped the British currency's recovery prospects, although it faces further imminent declines this week owing to the renewed threat of a 'no deal' Brexit.

Prime Minister Boris Johnson could announce as soon as Monday evening that a 'no deal' exit from the Brexit transition period has become the government's intended course of action from December 31 and, according to a Sunday report from The Times, would on this occasion have the support of his cabinet. 

This is after differences on the so-called level playing field and European access to UK waters remained too large following a conversation between Johnson and European Commission chief Ursula Von Der Leyen on Saturday. 

Talks continue Monday as the Internal Market Bill returns to the House of Commons from the House of Lords, although any reinsertion of terms relating to the EU Withdrawal Agreement's provisions on Northern Ireland is a risk that could further sour things between London and Brussels. 

Failure to resolve differences early in the new week would mean that if an agreement is to materialise at all before December 31, it might not be without the British currency first having endured a roller coaster ride that puts the Pound-to-Canadian Dollar rate's 1.70 support level under threat. 

"We think the GBP is at risk of a sharp correction upon a failure of trade talks and may weaken into the closing hours of today’s session if there are no major breakthroughs reported," warned Shaun Osborne, chief FX strategist at Scotiabank, who's long expressed doubt over whether an agreement could be reached at all. "The technical picture for USDCAD has deteriorated sharply." 

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

The Pound-to-Canadian Dollar rate fell nearly one percent on Friday even while hopes of an agreement being struck over the weekend were running high.

Friday's losses resulted mainly from Canada's blowout jobs report and a robust performance from oil prices following the Organization for Petroleum Exporting Countries (OPEC) decision to slowly taper off the production cuts that rescued oil prices from the multi-decade lows that prevailed amid the 2014-to-2016 commodity price collapse. 

This means the Pound-to-Canadian Dollar rate doesn't yet actually reflect any unique weakness in Sterling, which has been tipped by technical analysts at Commerzbank for a correction back to around 1.32 against the U.S. Dollar in the short-term. That would send GBP/CAD down to 1.69, obliterating a key 2020 support level around 1.6990 in the process, if the main Canadian Dollar exchange rate USD/CAD remains around Friday's 1.28 level.

"We would not fight USDCAD’s downward momentum for now. With the 1.2860s now out of the picture, we don’t see meaningful new chart support until 1.2740-80," says Eric Bregar, head of FX strategy at Exchange Bank of Canada.

If the UK government actually sets its sights on a trade relationship with the EU that is governed by World Trade Organization (WTO) terms and tariff rates, then Sterling could suffer even greater losses this week.

Analysts at MUFG warned on Friday of a possible GBP/USD fall to 1.25 in such circumstances, which would send GBP/CAD to an 18-month low of 1.60, although this decline would be compounded if USD/CAD falls further from Friday's 1.28. GBP/CAD always closely reflects the relative performance of between GBP/USD and CAD/USD. 

"We maintain our view that USD/CAD can grind lower in circumstances of broad USD depreciation. However, we don’t yet see the grounds for CAD catch-up and suspect the underperformance relative to other G10 currencies will continue. The BoC ultraeasy stance, to be confirmed next week, will reinforce that view," says Lee Hardman, a currency analyst at MUFG. "Based on out short-term USD/CAD model, spot looks to have over-extended to the downside. Like with GBP, we see the fiscal outlook in Canada as worse than in most other G10 countries which will likely reinforce underperformance ahead."

Above: USD/CAD alongside GBP/USD (black line). Simultaneous declines in the two always lead to large GBP/CAD losses.

The Pound-to-Canadian Dollar rate outlook for the week ahead is further darkened by the otherwise positive developments around coronavirus vaccines, which are set to begin being rolled out in the UK this Monday and could be available in Canada within weeks. Canada has bought up the developed world's largest stockpile of preordered vaccines, placing it in good stead to reopen the economy from what is a renewed state of 'lockdown' in some parts.  

"The outlook for the second half of 2021 got a big shot in the arm from the news that early vaccines are proving effective, even as the immediate economic backdrop remains challenging. Regulatory approval for the Pfizer/BioNtech vaccine has already been granted in the UK, and is expected to get the same support in the US as early as next week. With Canadian regulatory approval likely not far behind, the Bank’s assumption that vaccinations would ramp up by the summer of 2022 could be moved forward by as much as a full year," says Nathan Janzen, a senior economist at RBC Capital Markets. 

This vaccine stockpile could be of greater significance if it's acknowledged by the Bank of Canada (BoC) as a gamechanger for the economic and policy outlooks in Wednesday's 15:00 monetary announcement. This is partly because Canada's unemployment rate had already fallen from its May peak of 13.7% to just 8.5% in November before the first vaccine has even been administered, leaving closer to its 5.5% pre-pandemic low than its crisis peak. 

The BoC aimed its government bond buying (quantitative easing, QE) firepower at longer-term bond yields at its October meeting after succesfully subduing their short-term counterparts in earlier months, and said it would continue hoovering up Canadian government debt "until the recovery is well underway." Meanwhile, interest rates were set to remain at 0.25% "until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved."

Above: Pound-to-Canadian Dollar rate shown at weekly intervals with GBP/USD rate (black line, far axis).