Pound-Canadian Dollar Rate Could See 1.75 on Keystone Pipeline and BoC Risk

- GBP/CAD supported at 1.7280, with scope for 1.75.  
- As BoE rate rethink & vaccine help GBP to outperform.
- BoC, CA vaccine woe, oil pipeline decision looms over CAD.

Image © Bank of Canada, Reproduced Under CC Licensing

• GBP/CAD spot rate at time of writing: 1.7333
• Bank transfer rate (indicative guide): 1.6730-1.6852
• FX specialist providers (indicative guide): 1.7077-1.7216
• More information on FX specialist rates here

The Pound-to-Canadian Dollar exchange rate could retest late November highs around 1.75 this week if the Bank of Canada (BoC) and Canadian economic growth risks undermine penalise the Loonie.

Risks to USD/CAD and GBP/CAD could be on the upside following a Sunday CBC News report suggesting the planned Keystone XL oil export pipeline to the U.S. will have its permit scrapped by President Elect Joe Biden on his first day in office this week. 

Sterling has meanwhile been spurred to outperform as Britain's coronavirus vaccination rollout puts it on course for sustainable steps out of lockdown' by March and Bank of England (BoE) Governor Andrew Bailey lifted investors' interest rate expectations when he appeared to largely rule out a negative rate policy for the UK last week. 

"The UK’s vaccine rollout appears to be going to plan and this can support further Sterling gains," says Brian Daingerfield, head of G10 FX strategy at Natwest Markets. "The BoC opted not to engage in FX jawboning in its December statement, though we’ll be on the lookout for any FX jawboning in January’s communication."

The Pound-to-Candian Dollar rate tested 1.74 twice last week but would overcome this level to trade as high as 1.7518 if the main Sterling exchange rate GBP/USD trades back toward  the top of last week's 1.35-to-1.37 range, while mounting growth challenges and a looming BoC decision encourage an extension higher for USD/CAD. 

Above: Pound-to-Canadian Dollar rate shown at daily intervals alongside USD/CAD. 

"Bearish trend momentum has moderated across the shorter-term studies (intraday and daily) which will facilitate a squeeze higher. We spot key resistance at 1.2815 (40-day MA) and look for gains through the low 1.28s to support the case for a USD snapback to the 1.2850-1.2950 range at least in the near-term," says Shaun Osborne, chief FX strategist at Scotiabank. "We doubt the Bank will object too strongly to the CAD’s recent performance, the more so if the USD does push higher in the short run."

Some analysts anticipate GBP/USD will continue to outperform and USD/CAD will rise this week, a recipe for a higher GBP/CAD if there is one.

"Despite its recent outperformance, sterling does not show signs of short-term overvaluation (currently trading at the level of its short-term fair value). This limits its scope for a short-term pull back," says Petr Krpata, chief EMEA strategist for interest rates and FX at ING, which forecasts a GBP/CAD rate of 1.7375 in one-month.

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GBP/CAD would be found trading around 1.7280 and just beneath its Sunday open if Dollar strength or some other factor saw GBP/USD slip back to 1.35 and the bottom of last week's range while USD/CAD tracked higher to 1.28 in line with the outlook from Scotiabank. But analysts see the downside being limited for Sterling this week.

Meanwhile, the Bank of Canada's Wednesday policy decision is a further risk to the Canadian Dollar in which consensus favours a cash rate that sits unchanged at 0.25% and no adaptation of the BoC's quantitative easing programme. However,  there's a chance the Loonie itself comes under fire for recent gains over the greenback, given that BoC Governor Macklem recently expressed concerns about stronger exchange rates. 

"Near-term growth concerns have raised some speculation that policymakers could opt for a ‘micro’ interest rate cut – perhaps moving the overnight rate from its already low 0.25% to a smaller but still positive number, says Nathan Janzen, a senior economist at RBC Capital Markets. "We think the bank will look to the substantial fiscal support already in place, including the expanded EI payments and the new CRB, as sufficient to get the economy through the current rough patch and onto a firmer trajectory." 

Above: Pound-to-Canadian Dollar rate shown at daily intervals with GBP/USD (black) and CAD/USD (bue)

"Discussion of a possible mini cut could be a feature of the post-decision press conference. Note that BoC research has previously suggested that the effective lower bound may be below zero, even though the central bank has consistently, and repeatedly, rejected a negative policy rate," says Natwest's Daingerfeld. 

Wednesday's BoC decision comes immediately before President Elect Joe Biden's inauguration and with the U.S. Dollar resurgen, It follows a rally in bond yields and Biden's proposal for a further $1.9 trillion of federal government financial support for households, which is expected to bolster the U.S. growth outlook. It also follows the revelation that coronavirus vaccine deliveries could now be less than half that expected in Canada this quarter.

Meanwhile, Foreign minister Dominic Raab said on Sunday the UK government's target to vaccinate almost 15 million by the mid-February is unlikely to be affected by manufacturing hold-ups at Pfizer , while The Telegraph reported that all over-18s will have a chance to be vaccinated by June. This offers the UK the opportunity of an economic headstart in 2021 and at a point when a GBP/USD rally is becoming increasingly important for sustaining the EUR/USD uptrend and U.S. Dollar downtrend. 

"Positioning analysis shows GBP resilience for the coming week, as both continuation and reversal signals point to upside risks. GBP uptrends against USD and JPY, the so-called" safe-haven"currencies, remain  intact," says Vadim Iaralov, a quantitative strategist at BofA Global Research. "On the other hand, and amid a broad-based correction for the so-called"high-beta"currencies, GBP/G10 downtrends are all at medium or high risks of reversal."