GBP/CAD Tests Month Highs as Sterling Rallies and Loonie Lags

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The Pound to Canadian Dollar exchange rate reached a one-month high ahead of the weekend after a respectable February employment report from Canada was unable to stall a rally in Sterling that was fueled by a cocktail of better UK economic data and moderating expectations for North American interest rates.

Canada's economy continued to create jobs in February when employment rose by 22k against a consensus for only an 8k increase, making for a third successive surprise that was driven substantially by the private sector.

Gains in health care, support services and public administration led the total number of hours worked to rise while lifting growth in average hourly wages from an annualised 4.5% to 5.4% while providing one more reason for the Bank of Canada (BoC) to remain wary of inflation risk. 

"Still, the impacts of aggressive Bank of Canada interest rate hikes over the last year are still flowing through to household borrowing costs with a lag," says Nathan Janzen, assistant chief economist at Royal Bank of Canada. 

"The BoC focused on those building headwinds more than recent economic data in deciding to hold interest rates unchanged earlier this week - the first decision that didn't involve higher interest rates in a year," Janzen adds.

Above: Pound to Canadian Dollar rate shown at hourly intervals alongside USD/CAD. Click image for closer inspection.

Canada's Dollar did not appear to benefit from Friday's data, which may have been because of both the position adopted by the BoC on Wednesday as well as widespread U.S. Dollar losses and broad weakness for North American currencies generally. 

The BoC affirmed on Wednesday its "conditional pause" and intention to leave the cash rate unchanged at 4.5% until it has a clearer idea of the effect that last year's increases are having on the economy, leading the Loonie into a hat-trick of losses against some currencies including the Pound.

"While the jobs data might do little to assuage the BoC's concern over whether they have done enough on rate hikes, the CAD remains near-term challenged. US jobs data offered a mixed bag; stronger job growth but softer wages and unemployment rate," says Mazen Issa, a senior FX strategist at TD Securities. 

"The CAD is likely to stay on the defensive on crosses as well, where it may be more vulnerable against currencies that have fluidity around terminal rate pricing (ECB and the EUR for example). Fragile risk sentiment should also keep CADJPY downside intact," Issa writes. 

Issa also said on Friday that USD/CAD is unlikely to fall much further and could remain supported around the 1.3700 to 1.3750 area in the short term.

Above: Pound to Canadian Dollar rate shown at daily intervals with selected moving averages denoting possible technical supports and Fibonacci retracements of December downtrend indicating possible technical resistance. Click image for closer inspection. To optimise the timing of international payments you could consider setting a free FX rate alert here.

GBP/CAD was also lifted on Friday by Office for National Statistics (ONS) figures suggesting the UK economy pared year-end losses of GDP in January.

"We are still medium-term negative on GBP and our tendency would be to fade gains," says Adam Cole, chief FX strategist at RBC Capital Markets. 

January's 0.3% GDP rebound substantial reversed a -0.5% fall from December and partially vindicated a recent improvement in sentiment about the outlook.

The rebound was announced just days ahead of a March budget and amid uncertainty about the possibility or risk of stimulatory giveaways.

"The data suggest the UK economy may hold up better than most have been expecting in the early part of this year and might possibly avoid a recession. Markets continue to all but price in a 25bps for the March 23rd BoE meeting," says Shaun Osborne, chief FX strategist at Scotiabank.