Pound-Canadian Dollar Week Ahead Forecast: Recovery Stymied Near 1.7050 without Brexit Deal
- Written by: James Skinner
-
- GBP/CAD eyes recovery from 1.69 Sept lows on Brexit deal hopes.
- But may face roadblock around 1.7050 until trade deal is confirmed.
- Choppy conditions ahead as semantics dominate at the final furlong.
- Brexit rally could lift GBP to 1.7446, 'no deal' risks steep fall to 1.59.
Images © Adobe Stock, Pound Sterling Live
- GBP/CAD spot rate at time of writing: 1.6885
- Bank transfer rate (indicative guide): 1.6296-1.6414
- FX specialist providers (indicative guide): 1.6634-1.6769
- More information on FX specialist rates here
The Pound-to-Canadian Dollar exchange rate is poised to recover from punishing losses that pushed it back to September lows last week, but it faces choppy trading conditions and a potential roadblock at 1.7050 unless and until a Brexit trade agreement is reached.
Sterling was hands down the worst performing major currency last week after Prime Minister Boris Johnson said that a 'no deal' Brexit from the transition period is now the most likely outcome for December 31.
Johnson expressed similar sentiments again on Sunday, although after announcing that talks will continue this week rather than be called off as was envisaged if a breakthrough hadn't materialised over the weekend.
"By all accounts we are hurtling toward a no-deal being confirmed this weekend with both Boris Johnson and Ursula von der Leyen sounding very pessimistic on a deal being reached," says Lee Hardman, a currency analyst at MUFG, in a Friday note. "Contingency planning and agreements offer the best hope for reducing the reaction in FX next week...If there is a failure to agree contingency plans to limit the economic disruption, GBP depreciation of 5% to the mid 1.2000’s in cable still seems likely by year-end."
Above: Pound-to-Canadian Dollar rate shown at daily intervals.
GBP/CAD would trade 10 cents down and as low as 1.59 in the event that GBP/USD fell to 1.25 and USD/CAD remained around Friday's 1.2750. That would leave Sterling knocking on the door of post-referendum lows against the Canadian Dollar. Meanwhile, and in the event that an eventually announced deal leads GBP/USD back up to the 1.37 anticipated by analysts at ING and others, the Pound-to-Canadian Dollar rate would rise only as far as 1.7450.
Much rests as a result upon whether Prime Minister Boris Johnson means it when he says a 'no deal' exit will be the outcome if last minute talks fail to produce a European compromise, or if he's simply just playing a stage part in a pantomime that will mark at least a temporary end to the four-year Brexit saga.
"The GBP should be supported on dips near its 50-day MA at 1.3151 (conveniently the midfigure area) but the negative trend set over the past week marks a clear bearish turn," says Shaun Osborne, chief FX strategist at Scotiabank. "The “usual”, seasonal USD squeeze higher versus the CAD that often emerges in Q4 has been absent so far and we think the USD will be hard-pressed to rally significantly in the short run (absent some sort of considerable market turmoil, for example). We do think, however, that the USD decline may moderate in the next few weeks, especially if USD losses show signs of steadying around the upper 1.26s/low 1.27s."
{wbamp-hide start} {wbamp-hide end}{wbamp-show start}{wbamp-show end}
The upside for Sterling at Sunday's opening levels is little more than half the downside anticipated in the possibly-unlikely event the trade talks fail from here, so its recovery could be a slow and arduous endeavour, especially in light of the lopsided risks associated with backing it.
Furthermore, and in the short-term, the Pound-to-Canadian Dollar rate may struggle to get above 1.7050 without a Brexit-related impetus to lift the main Sterling exchange rate GBP/USD over and above nearby technical impediments on the charts. Technical analysts are looking for GBP/USD to meet resistance upon any recovery to 1.3373.
"GBP is now in downtrends for five of the GBP/G10 pairs, with potential to enter into more downtrends against USD and JPY," says Vadim Iaralov, a quantitative strategist at BofA Global Research, who says GBP/CAD is one of the two Sterling exchange rates that currently lack a directional trend. "GBPAUD's downtrend continuation signal is the most supported by positioning analysis, and it is our preferred pair for lower GBP in this coming week."
Above: USD/CAD rate shown at daily intervals alongside U.S. Dollar Index (black line).
Canadian strength was also a headwind for GBP/CAD last week and has the potential to continue pressuring Sterling this week, especially if the U.S. Dollar remains in decline, and more so after the Bank of Canada (BoC) appeared happy to write off recent gains in Loonie exchange rates as the result of a benign U.S. currency depreciation.
"The BoC stance will not get on the way of more CAD appreciation, in our view. Next week, November CPI numbers will be watched closely to track any additional signs of life in inflation following October’s surprising 0.7% YoY read," says Francesco Pesole, a strategist at ING. "We believe that some quite extensive short-squeezing has helped CAD of late, and while this may not appear evident in positioning data just yet, we are inclined to think CAD has now a more balanced positioning. Still, CAD has more to benefit from further global equity outperformance, better recovery prospects as a vaccine will start to be rolled out in North America soon and from the recovery in oil prices."
Brexit-related headlines will remain the dominant driver of Sterling and the Pound-to-Canadian Dollar rate this week, although strength in the Loonie could constrain the Pound's rallies and magnify any weakness that it experiences. For its part Canada's Dollar will be sensitive to the general mood among investors, the trajectory of stock markets and appetite for the U.S. Dollar given a relatively bare data calendar.
The U.S. Dollar could be weighed down in the week ahead, enabling the Canadian Dollar to rise, if investors respond positively to Friday's Food & Drug Administration approval of the Pfizer and BioNTech vaccine for emergency use in the U.S. and may even take a further knock from the Federal Reserve (Fed) at 19:00 on Wednesday.
"Markets ended the week on a cautious note on Brexit and US stimulus package worries. There’s also the Fed to look forward to this week," says David Croy, a strategist at ANZ. "The US Federal Reserve is on track to deliver more easing, likely in the form of increased duration of bond purchases. The latter is expected by many, but confirmation of it has potential to further weaken the USD."
Above: Pound-to-Canadian Dollar rate shown at weekly intervals.
