Pound-Canadian Dollar Week Ahead Forecast: Energy Market Rally Limits Recovery Prospects

- GBP/CAD steadying but recovery prospects limited
- Energy price rally, supply fears turn GBP/CAD table
- Fed, BoC, U.S. & CA labour data in focus up ahead

Image © Bank of Canada

• GBP/CAD reference rates at publication:
• Spot: 1.7113
• Bank transfer rates (indicative guide): 1.6514-1.6633
• Money transfer specialist rates (indicative): 1.6959-1.7027
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The Pound-to-Canadian Dollar rate had stabilised before entry into the new week but could be likely to remain suppressed near three-month lows if the recent rally in energy markets enables the Loonie to continue its tentative outperformance of other major currencies.

Canada’s Dollar was the only currency in the G10 contingent of majors to rise against the U.S. Dollar in the week to Monday while Pound Sterling was close to being the biggest faller even after paring losses in a strong and two-day long rally ahead of the weekend.

The Pound-to-Canadian Dollar rate around 1.71 following a tepid Friday climb off of three-month lows at 1.7059 but it would appear that it now has little if any real scope to further that earlier recovery over the coming days.

“If we are entering a world where markets worry about higher energy prices and hints of stagflation (though we are a long way off from the 70s), it stands to reason that CAD would be a relative outperformer in G10, though it would still underperform USD, which stands out as the main winner in a twin bond/equity sell-off,” says Adam Cole, chief FX strategist at RBC Capital Markets.

RBC Capital Markets have been sellers of GBP/CAD from last Monday.

UK and European economies are among the most reliant upon imports of natural gas, prices of which have risen by more than 100% this year for all buyers on international markets and by more than 300% for gas delivered at future dates that are further out into the winter months of 2021.

Vast natural resources mean Canada is a net exporter of energy including natural gas, leading its economy and currency to often benefit from higher prices, hence GBP/CAD’s spectacular fall last week as prices for December delivery of natural gas rose as much as 50% at their peak for the period.

Above: GBP/CAD at daily intervals with Fibonacci retracements of early May recovery indicating possible areas of technical support.

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The Loonie had been a laggard among major currencies through much of September while Sterling was an outperformer, but developments in energy markets and the Pound-to-Canadian Dollar rate’s collapse last week were significant.

“We think that China’s aggressive push to secure energy supplies for the next few months will keep energy commodities supported and act as key driver for CAD outperformance in the near term,” says Shaun Osborne, chief FX strategist at Scotiabank.

Many analysts now look for the Loonie to remain on its front foot, which could limit or outright prevent any Pound-to-Canadian Dollar rate recovery despite that the Bank of England (BoE) policy backdrop has become more supportive of Sterling in general during recent weeks.

“While pricing for the BoC looks rich (a hike fully discounted by June and a second hike more than priced by October 2022), the October MPR is almost a month away and we think there are opportunities to be tactically long CAD before then,” says RBC’s Cole.

Last Thursday’s upwardly-revised estimate of second quarter UK growth was significant for Sterling because it potentially vindicates money markets for betting the BoE could start reversing its crisis-inspired interest rate cuts over the coming months, but it’d done little for GBP/CAD.

“The CAD and NOK in G10 and the RUB in EM outperformed their peers last month but could be subject to profit-taking if crude prices retreat towards $75/bbl,” says Kenneth Broux, a strategist at Societe Generale.

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Societe Generale’s Broux tips Monday’s Organization of Petroleum Exporting Countries decision about future oil production levels as a key influence for oil producing currencies in the short-term and has warned there’s a risk of corrective pressure following reports last week that suggested the cartel could announce a far larger increase in supplies than was previously anticipated.

That would be supportive of the Pound-to-Canadian Dollar rate although once beyond Monday market attention will turn quickly to Friday’s U.S. and Canadian employment reports for the month of September, due out at 13:30, which will impact GBP/CAD through their effect on USD/CAD.

“Employment is ‘only’ about 0.8% below the pre-pandemic highs, so an increase in the order of 50-100k is good enough to confirm expectations that the BoC will conclude its quantitative easing programme in the next few months. Still, the US nonfarm payrolls print released at the same time will likely exert a stronger pull on USDCAD,” Scotiabank’s Osborne and colleagues wrote in a Friday note.

Often, though not always, GBP/CAD tends to follow USD/CAD so could find itself better supported if Friday’s U.S. payrolls report keeps the U.S. Dollar on its front foot, although with more than two million U.S. jobs either created or recovered from the coronavirus in the three months to the end of August there may be a greater chance of a soft or poor number this week than there would be for almost any other month.

“Any headwind to CAD will only come from external factors as domestic drivers are set to remain supportive,” says Francesco Pesole, a strategist at ING.

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