Pound-Canadian Dollar Rate: CAD to "Look Through Near-term Virus Concerns"

Modified: Monday, 12 April 2021 14:26 BST

- GBP/CAD has declined since late-Feb
- Opens new week stronger
- Questions asked of CAD on new lockdowns
- Barclays says CAD to be unfazed by virus resurgence

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GBP/CAD spot rate at time of writing: 1.7264
Bank transfer rate (indicative guide): 1.6661-1.6782
FX specialist providers (indicative guide): 1.6877-1.7144
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The British Pound starts the new week half a percent higher against the Canadian Dollar amidst a broad rally in the UK currency, but it faces an uphill slog if it is to recover the losses it has suffered against its Canadian counterpart since late February.

The Pound-to-Canadian Dollar exchange rate (GBP/CAD) declined 1.27% in the first week of April amidst a broad-based sell-off in Sterling, with some analysts saying the declines are largely the result of a clearing out of crowded bullish trades on Sterling.

GBP/CAD is quoted half a percent higher at 1.7262 at the time of writing on Monday, and we report that one major investment bank we follow has told clients that the clearing out of 'long' positions on Sterling over recent days, as well as an intact positive fundamental backdrop, mean the currency can recover.

Gains by Sterling come as England on Monday makes a major stride out of lockdown with all retail stores being permitted to open once more alongside hospitality businesses.

The reopening of a large portion of the economy comes amidst falling covid-19 infections and deaths, at exactly the same time Canada faces tighter restrictions due to rising cases.

Ontario, Canada’s biggest province, last week entered a four-week lockdown owing to a surge in Covid-19 cases and an increase in hospitalisations.

Ontario reported 4,456 new cases of Covid-19 on Sunday, as well as 21 additional coronavirus-related deaths.

As of Sunday morning, 605 COVID-19 patients were in ICUs – up 20 from the previous day - leading to concerns the health system could become overwhelmed.

The B.1.1.7 variant of the virus is said to be driving the surge in new infections and hospitalisations.

"The CAD underperformed its G10 peers last week, as a deadlier strain of coronavirus has surged through the province of Ontario, forcing it to declare state of emergency for four weeks," says a weekly FX analysis and strategy note from Barclays.

Both the Canadian Dollar and Pound have at times vied for the position of 2021's top performing currency and Sterling could reclaim the accolade if markets opt to approach the GBP/CAD outlook on the divergent direction of the pandemic in the two countries.

But the Canadian Dollar is being tipped by foreign exchange analysts at Barclays to remain well supported over coming months as they say investors will look "through near-term virus concerns" with regards to the Canadian virus situation.

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Barclays tell clients the decision to return Canada's most economically important province to lockdown will raise fears of a setback to the economic recovery.

But the Canadian economy has proven more resilient to covid lockdown measures than many had anticipated, and Barclays say the narrative of a more robust vaccine roll-out in the second half of 2021 and higher oil prices still implies a supportive backdrop for the currency.

"We don’t foresee a significant impact on the CAD from the new virus restrictions beyond the near term, and continue to forecast USD/CAD at 1.22 by year-end," says Barclays. "The narrative of a robust economic recovery remains firmly in place."

Foreign exchange analysts at Credit Suisse have meanwhile maintained a view that the Canadian Dollar will advance in 2021, however a near-term setback is likely owing to the spread of the coronavirus.

"Markets see a high likelihood of the BoC announcing tapering of asset purchases on 21 April: with Covid vaccinations lagging the U.S. and lockdowns still in place in Ontario and Quebec, we are less certain that these expectations will realise near-term," says Shahab Jalinoos, Global Head of FX Strategy at Credit Suisse.

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While a slow vaccination programme has apparently failed to prevent a major rise in hospitalisations and covid-19 infections, Credit Suisse tell clients they still ultimately remain bullish on the Canadian Dollar's prospects for the greater duration of 2021.

The bank says the fundamentals underpinning the currency are geared to U.S. growth and oil prices which bodes for a strong end to 2021 for the currency.

"The fundamental picture in Canada remains unequivocally strong, as the prospect of US demand momentum adds to the already beneficial impact from oil prices and from the multi-year consolidation / retooling of the local energy transportation network," says Jalinoos.

In addition, "the strong fiscal spending effort from the Trudeau gov’t also provides a homegrown source of support for CAD. Sovereign credit concerns remain on the backburner."

Credit Suisse forecast the Canadian Dollar has the potential to appreciate further over the course of the second quarter, even though they do identify the "strategic risks" mentioned earlier in the article.

The U.S. Dollar-to-Canadian Dollar exchange rate is quoted at 1.2587 at the time of writing, the Pound-to-Canadian Dollar exchange rate is quoted at 1.7322.