Pound-Canadian Dollar Rate in Nervous Breakdown after Sterling Spirals Over Brexit Worries
- Written by: James Skinner
-
- GBP/CAD eyes short-term stabilisation after largest loss since March.
- Following a renewed escalation of fears for future UK-EU relationship.
- But is doomed to resume its declines if nothing agreed this weekend.
- GBP may fall to 1.6714 after finding temporary support near 1.6862.
© Gov.uk
- GBP/CAD spot rate at time of writing: 1.6918
- Bank transfer rate (indicative guide): 1.6326-1.6444
- FX specialist providers (indicative guide): 1.6664-1.6800
- More information on FX specialist rates here
The Pound-Canadian Dollar rate suffered a nervous breakdown Thursday as Sterling spiralled with expectations for a Brexit trade agreement, sending GBP/CAD crashing through a key level in its largest loss since the March liquidity crisis, although it was stabilising ahead of the European close.
Sterling was resoundingly the worst performing major currency ahead of an evening European Council meeting in which EU leaders are expected to discuss the ongoing absence of progress in trade talks with the UK.
EU leaders will confer with each other after a meeting between Prime Minister Boris Johnson and European Commission chief Ursula Von Der Leyen did nothing to break the deadlock in trade talks on the evening before what was meant to be the last deadline for a deal to be done.
Thursday's meeting of EU leaders should have marked the point when they signed off on a trade agreement as well as other arrangements for the future relationship with the UK, although continued differences on key issues have thus far scuppered progress.
BREAKING: European Council programme has been adapted after the Johnson/VdL dinner. Leaders will now discuss Brexit this evening, as first item during their dinner.
— Adam Parsons (@adamparsons) December 10, 2020
"Markets may buy the pound into the weekend as they rebuild their (what we believe is misplaced) optimism that the EU and the UK come to an agreement on trade. Watch for Brexit headlines to almost exclusively drive the GBP through the rest of the week," says Shaun Osborne, chief FX strategist at Scotiabank.
Now is the time for the public and businesses to get ready for the Australian option on January 1st. pic.twitter.com/lLJfmIy9XI
— Boris Johnson (@BorisJohnson) December 10, 2020
Above: Pound-to-Canadian Dollar rate shown at hourly intervals.
PM Johnson and the EU's Von Der Leyen both said on Wednesday evening that Sunday is now likely the last opportunity for the two sides to agree terms of the future relationship and still have the chance to ratify the agreement in all of the EU member states' parliaments.
"GBP continues to trade in a rather wide range for the month with today’s leg down wanting to catch a break around the 1.33 mark (high 1.32s) that has acted as a key support marker on multiple occasions over the past three or so weeks (and was resistance on two occasions in November)," Osborne adds, referring to GBP/USD. "The GBP’s decline may extend upon a firm move below 1.33."
Investors had evidently recovered and retained some hope that a deal might've been struck on Wednesday evening, given the Pound had also by that time recovered much of the loss sustained on Monday when there was seemingly an elevated chance that Johnson would announce in the evening that he intended to pursue a 'no deal' Brexit.
Monday's losses saw the Pound-to-Canadian Dollar rate slide from just beneath the 1.72 handle, to just below the 1.70 level that had previously provided strong support to Sterling earlier in 2020, although the exchange rate crashed below there in convincing fashion on Thursday.
Above: Pound-to-Canadian Dollar rate shown at daily intervals.
The Pound-Canadian Dollar rate entered Thursday's session on the back foot and remained on a downward trajectory throughout, taking it from 1.7190 to a low of 1.6968, although with the main Sterling exchange rate GBP/USD finding support at 1.3290 at the European close GBP/CAD was stabilising.
"Support for a setback remains at 1.3291/89 initially, below which can see a fall back to 1.3225, then 1.3109," says David Sneddon, head of technical analysis at Credit Suisse, also referring to GBP/USD. "With Brexit talks still ongoing and critically placed, further near term volatility should clearly still be allowed for. Our core outlook from September remains unchanged though and we view this as a temporary consolidation and we continue to look for an eventual clear and closing break above 1.3514 to see a major base secured."
The mechanics of the foreign exchange market are such that GBP/CAD always closely reflects the relative performance of GBP/USD and CAD/USD, which were beginning to head in opposite directions by the European close on Thursday, which is always a recipe for a rising Pound-to-Canadian Dollar rate. But with Sterling having steadied itself against the U.S. Dollar around 1.3290 just as USD/CAD turned higher of 1.27, the Pound-to-Canadian Dollar rate could have found a short-term bottom.
Given the lingering prospect of a Brexit trade agreement being struck over the weekend, investors may not want to sell the Pound against the greenback from current levels, which are close to the low of the week and argue for stability ahead of the Friday close. However, GBP/CAD's Thursday losses were not driven solely by Sterling's declines, as the Canadian Dollar also strengthened too and price action in USD/CAD is equally as important for the Pound-to-Canadian Dollar rate outlook.
Above: GBP/USD rate shown at hourly intervals alongside USD/CAD (black line).
"After the break below 1.28, we suspect the market is less long-USDCAD now, but we doubt the market has gotten itself to short-USDCAD at this juncture. Any attempt to push USDCAD higher is more likely to run into offers from Canadian corporate hedgers than stop losses from global leveraged funds," says Greg Anderson, global head of FX strategy at BMO Capital Markets.
The rub for Sterling however, is that with the U.S. Dollar near universally out of favour with investors and the Bank of Canada (BoC) having given the Loonie a free pass to cede ground to its North American cousin, the Canadian Dollar has pushed USD/CAD below its own important technical support levels. Furthermore, USD/CAD's recovery potential is widely viewed by analysts as limited if-not non-existent, which is a headwind for GBP/CAD.
For the length of time that both GBP/USD and USD/CAD are steady, Sterling could also stabilise against the Canadian Dollar. However, with USD/CAD expected to resume declines before long, the Pound-to-Canadian Dollar rate will also inevitably at some stage resume its decline unless and until an agreement outlining the future UK-EU relationship is struck.
If GBP/USD was to break lower toward the 1.3225 and 1.3109 levels flagged by Credit Suisse and Scotiabank, while USD/CAD trades around 1.2750, the Pound-to-Canadian Dollar rate would initially fall back to 1.6862 before later declining to 1.6714. That would the Pound closer to 2020's low at 1.6552 than it would the levels prevailing at the close of business in Europe on Thursday.
Above: USD/CAD rate shown at daily intervals alongside GBP/USD (black line).
