MENU

Pound-to-Canadian-Dollar Rate Recovery Tipped for Wednesday by TD Securities 

Image © Pavel Ignatov, Adobe Stock

- GBPCAD nears two-year low but TD tips rebound Thursday.

- UK GDP data to lift GBP on Wednesday, ahead of the BoC. 

- Bank of Canada decision a two-way risk for GBP/CAD rate. 

- But Scotiabank looks for further losses amid CAD strength.

The Pound-to-Canadian-Dollar rate fell close to a two-year low amid Tuesday but analysts at TD Securities are tipping the British currency for a rebound on Wednesday, which will see both UK GDP data and the latest interest rate decision from the Bank of Canada (BoC) hit the market. 

Pound Sterling lagged all of its G10 counterparts other than the Australian Dollar Tuesday, with losses approaching -0.50% against most majors after a key technical level gave way during the morning session, but the Toronto-headquartered TD Securities sees scope for fundamental factors to pick the currency back up again Wednesday. 

TD has singled out the Pound-to-Canadian-Dollar rate, which has fallen the most of all Sterling pairs this year, as being particularly liable for a short-term recovery. The bank is eyeing UK GDP data for the month of May that is due out a 09:30 London time as the likely catalyst. 

"With concerns over the UK's growth prospects rising, we are actually looking for notable upside to the UK's May monthly GDP report. While macro data has played only a small role recently in the GBP's path, we think this could be the catalyst for some short covering - if realized. Here, GBPCAD looks particularly stretched to the downside," says Ned Rumpeltin, European head of FX strategy at TD, in a note to clients. 

Above: Pound-to-Canadian-Dollar rate shown at daily intervals. 

Consensus is looking for a 0.3% increase in May GDP growth to partly offset the 0.4% slump that was seen in April, although TD Securities forecasts a much stronger 0.5% gain. The bank could be onto something too because GDP data for January and the final quarter of 2018 followed a similar path, 

UK GDP growth slowed to 0.2% in the final quarter of 2018 after the economy contracted by a show-stopping 0.4% during December alone. However, GDP growth then rebounded by an even larger 0.5% in January and the economy retained those gains throughout the first-quarter. 

TD appears to be betting that a similar pattern could now play out this week. It's not yet clear whether any of these swings in monthly GDP numbers has anything to do with the Office for National Statistics (ONS) only recently having begun collective and publishing them, or if they do accurately represent the ebb and flow of activity.

Currency markets care about the GDP data because it reflects rising and falling demand within the economy, which has a direct bearing on the consumer price inflation rates that dictate interest rate policy. And interest rates themselves are a raison d'être for most moves in exchange rates.

There is significant uncertainty around the outlook for Bank of England (BoE) interest rates at the moment due to the ongoing Conservative Party leadership election, which will determine the next UK Prime Minister and the nation's likely path out of the European Union. 

"We note that the daily relative-strength-index (RSI) in GBPCAD is at its most 'oversold' since late 2016. If our above-consensus GDP forecast is realized, we think this could begin to correct - particularly if the BoC surprises us and rejoins the chorus of dovish major central banks," Rumpeltin says. 

Above: Pound-to-Canadian-Dollar rate shown at weekly intervals. 

Fears that the likely victor in the leadership battle, former foreign secretary Boris Johnson, will attempt to go for a 'no deal' Brexit have seen economists turn more pessimistic on the outlook for UK growth and analysts advocate eschewing Pound Sterling. The whole thing has also sidelined the BoE. 

Bank of England policymakers have long said they think that UK inflation pressures are such that interest rates will need to rise over the coming years, although they've been unwilling to lift Bank Rate ever since August 2018 because of uncertainty over where the UK economy will be once the ever-retreating Brexit date comes and goes. 

"On a medium-term basis, we are similarly concerned that the UK's economy and currency are both heading for rocky shores. Over a (very) short-term horizon, however, we think the bearishness toward GBP looks a little overstretched," Rumpeltin says. 

The Pound-to-Canadian-Dollar rate could well receive a lift in the morning hours Wednesday if the UK data is better than the market expects but after that it will run headlong into the latest interest rate decision and economic forecasts from the Bank of Canada. 

"The broader trend towards CAD appreciation remains well-entrenched across multiple timeframes, suggesting that (despite the significant depreciation already seen) the GBP move lower has further to run while gains are liable to remain limited," says Eric Theoret, a strategist at Scotiabank. "We spot major resistance at 1.6595/00 and continue to look for a test of the 1.61 area at least."

Above: Pound-to-Canadian-Dollar rate shown at monthly intervals.

Canada's economy has shown signs of recovering during recent months from a slowdown that spanned October 2018 to March 2019 while inflation surged far above the 2% target in May, which could make it difficult for the Bank of Canada to follow other G10 counterparts in cutting rates. 

Investors the world over have feared for the global economy in recent months given repeated bouts of trade-related tensions between the U.S. and China, which have already contributed to central banks in Australia and New Zealand cutting their interest rates.

Trade uncertainty has also seen markets begin to bet the Federal Reserve and European Central Bank will soon cut rates too, although Canada has stood apart from the crowd which is part of the reason why the Loonie is the best performing G10 currency this year. 

The Bank of Canada has said future rate decisions would be dependent on "developments in household spending, oil markets and the global trade environment." The comments appeared to make future hikes contingent on a deescalation of the U.S.-China trade war and a range of other factors. 

And Presidents Donald Trump and Xi Jingping agreed at the end of June to avoid imposing further tariffs on each other and to resume talks aimed at addressing U.S. concerns over "unfair" trading practices. Meanwhile the WTI oil price, which is a significant driver of the Loonie, has risen 27% in 2019.

As a result the Bank of Canada could find it difficult to justify any lean toward cutting Canadian interest rates any time soon. Markets will watch the bank closely on Wednesday for clues about the outlook in that regard and if the BoC does anything to suggest that Canadian rates will remain where they are for a while to come, it could take any wind from the sails of the Pound-to-Canadian-Dollar rate.  

 

BannerTime to move your money? Get 3-5% more currency than your bank would offer by using the services of foreign exchange specialists at RationalFX. A specialist broker can deliver you an exchange rate closer to the real market rate, thereby saving you substantial quantities of currency. Find out more here.

* Advertisement