Pound-Canadian Dollar Week Ahead Forecast: Struggling as Loonie Steadies with Global Markets

- GBP/CAD risking test of support near 1.7300
- CAD steadies with global markets & USD ebbs
- As Fed dominates quiet week for UK, CA data
- CA election discount supports into September

Above: File image of Prime Minister Justin Trudeau. Image © Alex Guibord, Accessed Flickr, reproduced under Creative Commons licensing.

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The Pound-to-Canadian Dollar exchange rate entered the new week reduced from three-month highs but would risk a further correction as far as an important level of support near 1.73 over the coming days if the Loonie recovers its footing alongside stabilising global markets.

Canada’s Dollar was sold heavily last week, making it one of the worst performing major currencies in price action that briefly lifted the Pound-to-Canadian Dollar rate above 1.76 and to its highest level since late March amid a bout of instability in global markets.

Commodity currencies were the biggest losers from an escalation of investor concerns about the outlook for the global economy, which built before and after the Federal Reserve (Fed) suggested the process of winding down its quantitative easing (QE) programme could begin by year-end.

The result was steep losses for risk assets including prices of commodities and strong gains for the U.S. Dollar, which the Pound-to-Canadian Dollar rate often demonstrates a positive correlation with, although some analysts say the Loonie’s declines were excessive and that they could now be pared back.

“While the decline in global oil prices is clearly one reason for CAD weakness, with the potential for Fed taper being another, we think the currency move has overshot both of those fundamental stories,” says Greg Anderson, global head of FX strategy at BMO Capital Markets.

“With that in mind, we think USDCAD is a sell above 1.29 and EURCAD is a screaming sell above 1.50. However, while the levels are good, we're less certain that the timing is 100% perfect,” Anderson writes in a Friday research note.

Above: Pound-to-Canadian Dollar rate shown at daily intervals with major-moving averages and USD/CAD.

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The Canadian Dollar is sensitive to the price of the oil as well as the trajectory of global stock markets, all of which had stabilised on entry into the new week and would weigh further on the Pound-to-Canadian Dollar rate if that stability endures over the coming days.

“WTI crude oil lost ~8% since last Friday while iron ore dropped by over a fifth as Chinese steel production looks to slow considerably in the months ahead amid reduced demand and production curbs to tackle pollution,” says Shaun Osborne, chief FX strategist at Scotiabank.

“Technically, the USDCAD is in overbought territory with the signal acting as a trigger for corrections in the USD in June and July. The 1.30 zone will also act as strong resistance as it roughly marked the bottom in USDCAD through 2019 and the latter part of 2020,” Osborne adds.

There are multiple candidates to explain recent market instability including further signs of a slowdown in China, renewed ‘lockdown’ in New Zealand, the prolongation of restrictions in Australia and threat of a fresh shutdown in Israel, each of which asked a question of the global economic outlook.

Further turbulence could never be ruled out but with global markets in recovery mode early in the new week and analysts flagging the Canadian Dollar as having been oversold in recent days the more immediate risk is that a corrective rebound by the Loonie weighs on GBP/CAD this week.

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“The Jackson Hole economic symposium will be the key event for markets with the Fed’s Powell scheduled to speak on Friday at 10ET, although we don’t expect the Chair to deviate from his typically dovish message,” Scotiabank’s Osborne says.

Rallies in USD/CAD and GBP/CAD were also driven last week by minutes of the Fed’s July meeting that suggested it could announce as well as commence the process of tapering its $120BN per month bond buying programme before the year is out, earlier than was previously anticipated.

But if U.S. Dollar bulls were to grow more cautious ahead of this Friday’s 15:00 London time address from Fed Chairman Jerome Powell in Jackson Hole, then the Pound-Canadian Dollar rate could potentially struggle further if its positive correlation with USD/CAD holds.

However, it’s possible the Loonie’s recovery prospects will be limited and the corrective potential of the Pound-Canadian Dollar rate relatively shallow if BMO Capital Markets is right to be thinking that the Canadian currency may be susceptible to uncertainty connected with the election on September 20.

“While we attribute the bulk of the 'overshoot' to surprised thin markets, we also point out that we may be now seeing the typical negative bubble in the loonie that has historically happened around 1M prior to an election. That neg-bubble should go away post election, if not earlier,” BMO’s Anderson says.

Above: BMO Capital Markets graph showing USD/CAD deviating sharply to the north of estimated fair value.