Canadian Dollar Linkage to U.S. Dollar Helps GBP/CAD, EUR/CAD Outlooks

"EURCAD higher is a trade that works in many scenarios " - Brent Donnelly, Spectra Markets.

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The Canadian Dollar outperformed all major counterparts in the opening half of the week but its earlier losses and the Loonie's linkages to the U.S. Dollar are just some of the reasons why multi-month rallies in GBP/CAD and EUR/CAD could extend further in the weeks ahead.

Canada's Dollar was a notable outperformer for the week to Wednesday after rising against all counterparts in the G10 contingent while ceding ground to only a small handful of G20 currencies.

But these gains have been mostly corrective and come amid an extended stretch of losses that had seen GBP/CAD and EUR/CAD test important levels of technical resistances on the charts just last week.

"A close above 1.6748 at the end of this week (i.e., month-end) should add significantly to already bullish trend momentum. A firm close on the week/month should see GBP gains extend to the 1.73/1.75 range," says Shaun Osborne, chief FX strategist at Scotiabank.

"Losses below here will rob the GBP of some momentum at least and could see the GBP slip to the 1.64/1.65 range," Osborne adds in a Monday look at the Canadian Dollar charts.

Above: Pound to Canadian Dollar rate shown at daily intervals with Fibonacci retracements of September 2021 downtrend indicating possible areas of technical resistance for Sterling while selected moving averages denote prospective support or resistance. (To optimise the timing of international payments you could consider setting a free FX rate alert here.)

Canada's Dollar has rallied alongside stocks and other North American currencies amid a recent recovery for bank stocks and an apparent easing of investor concerns about the stability of the banking sector.

But earlier funding pressures are widely expected to hamper the U.S. economy and have already led the Federal Reserve (Fed) to adopt a more cautious interest rate stance that has crimped market enthusiasm for the U.S. Dollar and could have implications for the Canadian Dollar too.

"We will consider the macroeconomic impact of this evolving situation as we put together our next projection," Deputy Governor of the Bank of Canada (BoC) Toni Gravelle said on Wednesday.

"We’ll be looking specifically at potential spillovers into the real economy to the extent that financial conditions tighten and there are broader confidence effects," he told the National Bank Financial Services Conference in Montreal.

Canada's Dollar has been an outperformer alongside the U.S. Dollar for much of the time since the Fed first shifted its policy stance in a hawkish direction in June 2021 and partly because of Canada's close proximity to the U.S. 

But this relationship also works in reverse and recent turbulence in the banking sector is expected to weigh more heavily on the U.S. economy, Fed and Dollar than it is anything in Europe, suggesting downside risks for the Loonie too.

Above: Euro to Canadian Dollar rate at daily intervals with Fibonacci retracements of September 2021 downtrend indicating areas of technical resistance while selected moving averages denote prospective support or resistance. Click image for closer inspection. (To optimise the timing of international payments you could consider setting a free FX rate alert here.)

"I think EURCAD higher is a trade that works in many scenarios," writes Brent Donnelly, CEO at Spectra Markets and a veteran FX trader with time spent at hedge funds and international banks like Lehman Brothers and HSBC, in Tuesday's edition of the AM/FX newsletter.

"Only a complete collapse in credit (which I do not expect right away) takes us to the crisis side of the USD smile (bullish USD)," Donnelly adds.

While EUR/CAD and GBP/CAD have been negatively correlated with the U.S. Dollar for more than a year now, Canada's economy and its impact on Bank of Canada (BoC) interest rate policy could yet elicit divergence between the Loonie and greenback in the months ahead.

However, local data has shown Canadian inflation beginning to retreat over the recent months and so the prospect of the current "conditional pause" in the BoC interest rate cycle being interrupted by further increases in the cash rate is potentially a slim one at its best.

"New cycle highs (highest since Sep 2020) and strengthening trend momentum oscillators leave the door open to the sustained push above 1.4793 long-term retracement resistance (61.8% Fibonacci of the 2020/22 decline)," Scotiabank's Osborne says while tipping EUR/CAD for a medium-term run at 1.53.

Above: EUR/CAD at weekly intervals with Fibonacci retracements of 2020 downtrend indicating possible areas of technical resistance for while selected moving averages denote prospective support or resistance.