Sell Sterling buy Canadian Dollar says Commonwealth Bank Strategist

A widening gap between real interest rates, firmer crude oil prices and an uncertain outlook for the U.K. economy could mean GBP/CAD has further to fall and that shorting it is a good idea for traders. 

Investors and traders should sell the Pound short against the Canadian Dollar say strategists at Commonwealth Bank Australia.

The call comes amidst expectations that firm crude oil prices and uncertainty over Britain’s pending exit from the EU are likely to conspire to push the currency pair lower during the months ahead.

Shorting is trader parlance for selling, i.e. buy the Canadian Dollar, sell the Pound.

A widening differential in real interest rates is also a factor that should favour the Canadian unit, with an increasingly hawkish Bank of Canada set to push rates higher over the coming months. 

Meanwhile the Bank of England’s hands remain tied to its current policies.

“We recommend investors sell GBP/CAD at current levels (1.6025) with a target of 1.4900 and a stop loss at 1.6400,” says Elias Haddad, a senior currency strategist at CBA.

At the time of writing, the spot market quote for GBP/CAD is at 1.6174.

The BoC is widely expected to raise its benchmark interest rate by 25 basis points in October, taking it to 1%, while economists at Commonwealth Bank see Canadian interest rates rising by a further 50 basis points in 2018.

“Canada’s economy is growing at its fastest annual pace in almost three years driven by a solid domestic demand growth,” says Haddad.

This is while a fall in the U.K.’s headline rate of inflation for July was seen as firmly undermining the hawk’s case for the Bank of England to hike rates later in the year in order to head of rising inflation.

In fact, weaker household spending and a return to the negative wage growth of the post-crisis years to 2013 could see the Bank of England’s hands tied to its current policy for some time to come

“Our base case scenario is for the BoE to keep the policy rate at 0.25% until Q2 2019 because currently high U.K. inflation is expected to slow and U.K. economic activity will likely disappoint,” Haddad wrote.

The pound to Canadian dollar exchange rate was trading around 0.2% lower, at 1.6141, in London Tuesday. It has already fallen by around 2.5% during the year to date.

“Granted, GBP/CAD looks technically oversold....But firm crude oil prices (chart 4) and Brexit-related political uncertainties will continue to weigh on GBP/CAD,” says Haddad.

Other analysts have noted that the Pound to Canadian Dollar exchange rate may be oversold on a short term basis, although there is near unanimity on the likely medium term trajectory of the currency pair.

“GBPCAD is testing its 9 day Moving Average (1.6153) and we note the potential for gains toward the July low in the mid-1.62 area,” says Scotiabank chief FX strategist Shaun Osborne, after flagging that the bearish trend appears to be on the verge of exhaustion in his morning note to clients.

“We are short-term GBPCAD bulls, however the medium-term trend remains bearish,” Osborne wrote.

Get up to 5% more foreign exchange by using a specialist provider by getting closer to the real market rate and avoid the gaping spreads charged by your bank for international payments. Learn more here.