Pound on Course for 22-year Lows against Canadian Dollar says Investment Bank

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The Pound is likely to shed further value against the Canadian Dollar, according to new analysis from Swedbank that suggests it will fall to its lowest level in 22 years.

The Scandinavian lender and investment bank's research division says it remains concerned with the prospect of a stagflationary outlook for the UK economy, meanwhile Canada's Dollar should benefit from a 'hot' economy and a credible response from the Bank of Canada.

"We look for GBP to make new multi-year lows," says Anders Eklöf, foreign exchange strategist with Swedbank.

Above: Bank of England forecasts stagflation in UK. Image courtesy of Swedbank.

The call comes amidst an ongoing period of outperformance for the Canadian Dollar which is the second-best performing major currency of 2022, behind the U.S. Dollar.

The Pound, by contrast, is nearer the bottom of the pile, with markets expressing concerns over the UK's economic outlook.

"GBP is historically weak, and positioning is short," says Eklöf. "You might think the stagflation case is priced in. However, it is difficult to see the light in the tunnel for GBP."

The Pound to Canadian Dollar exchange rate (GBP/CAD) has fallen 9.0% in 2022 amidst surging domestic inflation rates and lacklustre economic growth.

The Bank of England has meanwhile been widely accused by critics of being too slow in its reaction to inflation that leaves it disappointing against market expectations. In short, this means the market is always pricing in more rate hikes than the Bank has been willing to deliver, ensuring a continuous run of 'dovish' Bank of England policy updates.

A look at the monthly chart shows GBP/CAD is nearing long-term lows, meaning making payments into Canadian Dollars from Sterling is at its costliest since May 2013.

But, further declines to levels last seen in 2010 are possible according to Swedbank.

Above: Long-term chart (monthly) intervals, showing a multi-year decline in value of GBP/CAD. Set your FX rate alert here.

Concerning domestic politics, Eklöf says talk of tax cuts and an extra budget from the leading Conservative candidate Liz Truss is unlikely to be a gamechanger for GBP as it would worsens the Bank of England's battle against inflation.

"We look for GBP to make new multi-year lows over the next 3 to 6m on the back of both cyclical and structural factors," says Eklöf.

The Bank of Canada is meanwhile tipped by Swedbank to slow its pace of hiking going forward, "but it can't be too complacent given the overheated economy."

The Bank surprised markets by hiking rates by 100 basis points last month, a move that highlights its proactive approach to setting policy.

This activism contrasts with the slow and reluctant approach to hiking at the Bank of England, which inevitably leaves markets disappointed and weighs on Sterling.

Swedbank says Canada's strong term of trade also adds to the case for Canadian Dollar outperformance,

"GBPCAD has travelled a long way, but a test of 1.50 should be in reach later this autumn (1.55 now)," says Eklöf.

This would leave the exchange rate at its lowest levels since 2010 and at risk of printing all-time lows.