Pound-Canadian Dollar Forecast: Unravelling as New Virus Hits, Brexit Talks Go to Wire 

- GBP/CAD liable to unravel +2% gain on sluice of bad news.
- As new virus strain threatens months of economic closures.
- Brexit talks go to wire with only a week to begin ratification.
- GBP/CAD eyes fall back to 1.6970, but may steady at 1.71.

Image © Adobe Stock, Pound Sterling Live

• GBP/CAD spot rate at time of writing: 1.7267
• Bank transfer rate (indicative guide): 1.6710-1.6805
• FX specialist providers (indicative guide): 1.7050-1.7168
• More information on FX specialist rates here 

The Pound-Canadian Dollar rate clung to a handsome gain last week even after unravelling on Friday, but it now faces a return trip back toward December's lows as the Brexit talks go to the wire and the economy is ravaged by a new and more contagious variant of the coronavirus. 

Sterling unravelled late last week but the Pound-to-Canadian Dollar rate remained more than 2% higher for the period after an earlier bout of Brexit-related optimism lifted it sharply, but faces a sluice of bad news from the open on Sunday that could see GBP/CAD on the back foot from the outset. 

Brexit talks remained deadlocked on Sunday and the BBC was citing anonymous officials for suggestions that a 'no deal' exit from the transition at 23:00 on December 31 was still the most likely outcome, with a decision to come on Christmas day as to whether attempts to reach an agreement should continue if one hasn't been struck by then.

Above: Pound Sterling performance against major currencies last week. Source: Pound Sterling Live.

"Talks may be going down to the wire, but the wire keeps moving. For today, the position squaring explanation seems the most valid. It is not clear at what point GBP will get truly troubled by the continued lack of agreement," says Daragh Maher, Americas head of research at HSBC in a Friday note. 

There's now barely a week before time runs too short for a pact to be ratified in London and with barely a fortnight until the UK defaults to World Trade Organization (WTO) terms in the absence of an agreement, the prospect of which is likely to be a burden for the Pound this week. 

Although the new 'lockdown' for much of England's population may matter as much as the ongoing Brexit stage drama, given that it was compelled by a new and more infectious variant of the coronavirus that looks set to leave further scars on the economy.

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

Already some European countries have banned incoming flights from the UK while others are taking steps to do so, although most notably for the economy is health secretary Matt Hancock's hint that these restrictions could remain in place until a vaccine is available nationwide.

"It’s going to be very difficult to keep it under control until the vaccine’s rolled out," says Health Secretary Matt Hancock in a Sunday interview with Sky News. "We've got a long way to go to sort this. Essentially, we've got to get that vaccine rolled out to get people safe...All of the different measures we have in place, we need more of them to control the spread of the new variant than we did to control the spread of the old variant. That is the fundamental problem."

Prolonged closures of supposedly non-essential businesses and restrictions on movement until mass vaccination is possible would undermine the 2021 recovery that the Pound and many other currencies have increasingly anticipated in recent months, certainly if it transpires that existing vaccines are incompatible with the new variant. 

There's uncertainty over whether vaccines on their way to market will be effective in guarding against the new strain, which the government is looking to provide clarity on. Brexit uncertainty and a new connotation for the term 'sick man of Europe' are a recipe for underperformance by the Pound this week.

"USDCAD is losing short-term momentum around the May low and psychological support at 1.2730/00. USDCAD remains in its near -term range and is still struggling to pick up short -term momentum, with the daily RSI actually turning up from oversold territory. Hence, we think that there is potential for an extension of the rangebound environment in the near -term," says  David Sneddon, head of technical analysis at Credit Suisse. 

The main Sterling exchange rate GBP/USD has little support between its opening level around 1.35 and the 1.34 as well as 1.3263 levels, both of the latter being thresholds that imply losses for GBP/CAD early in the week. GBP/CAD would slip just beneath the 1.70 level if GBP/USD made it all the way back to 1.3263 and the Canadian Dollar gave a resilient account of itself by holding steady around Sunday's opening level near 1.28.

Above: USD/CAD shown at daily intervals alongside U.S. Dollar Index (orange line, left axis).

"The CAD rally has stalled, as we expected it might. Against a generally soft USD, the CAD is showing the barest of gains over the week – less than 0.1% at writing – leaving it at the foot of the G10 performance league and down on the crosses broadly as a consequence. This despite handy gains in crude oil prices, positive stocks and mostly better domestic data," says Shaun Osborne, chief FX strategist at Scotiabank. "The absence of clearer CAD progress in the face of what seems to be a generally positive backdrop reinforces the near-term outlook for further consolidation in USDCAD over the holiday break." 

Scotiabank and others see the Loonie steady this week rather than pushing USD/CAD lower, which would leave Sterling to determine the outcome for GBP/CAD. However, the Canadian Dollar has underperformed since Bank of Canada (BoC) Governor Tiff Macklem signalled unease last week over its recent appreciation and to the extent these concerns remain at the forefront of investors's minds in the week ahead, they may help arrest declines in the Pound-to-Canadian Dollar rate. 

Any upward moves in USD/CAD would be a source of support for GBP/CAD, which always closely reflects relative price action in GBP/USD and USD/CAD. GBP/CAD would be found around 1.71 if the Loonie weakens with Sterling or if the U.S. Dollar strengthens and either move lifts USD/CAD back to 1.29.

"There’s plenty of evidence that Canada’s export performance has been held back since 2008 by an overvalued exchange rate. It’s been a 12-year period of red ink in the trade balance, and generally weak contributions to growth from real exports, even when the global economy was booming. That left the economy excessively dependent on leveraged consumers and housing. Governor Macklem has now rightly called out the recent appreciation in the C$ as a concern," says Avery Shenfeld, chief economist at CIBC Capital Markets. "But sometimes being more explicit is necessary to draw the attention of financial markets. If you’re going to complain about the weather, or what markets are doing, start by talking louder and see whether the weather gods, or those pushing the currency around, take notice."

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