Pound-to-Canadian-Dollar Rate Seen Heading to New Post-referendum Low as Brexit Selling Intensifies

Image © Bank of Canada 

- GBPCAD rate risks falling to new low says Scotiabank. 

- Warns "bear" signals on the daily charts are strengthening.

- Outlook darkens as UK Gov eschews Brexit talks with EU.

- Westpac walks away from bet on GBPCAD rate increase.

The Pound plumbed new depths against the Canadian Dollar for 2019 Tuesday but is in danger of falling to what would be its lowest levels since a long time before the Brexit referendum of 2016, according to technical analysts at Scotiabank, as Brexit fears escalate further. 

Sterling has been clobbered so far in the new week as Prime Minister Boris Johnson's honeymoon period was brought to an abrupt end by short-sellers responding to the UK government's latest pivot in the Brexit negotiations. 

The government has eschewed further Brexit talks with the EU and claims it'll take the UK out of the bloc via a 'no deal' Brexit at the end of October if Brussels does not agree to remove the so-called Northern Irish backstop from the agreement it struck with former Prime Minister Theresa May. 

Above: Pound Sterling performance Vs G10 rivals this month. Source: Pound Sterling Live.

"The Prime Minister made clear that the government will approach any negotiations which take place with determination and energy and in a spirit of friendship, and that his clear preference is to leave the EU with a deal, but it must be one that abolishes the backstop," says a Downing Street spokesperson, following a conversation between PM Johnson and his Irish counterpart. "The UK will be leaving the EU on October 31, no matter what."

The EU has long claimed it won't entertain altering the withdrawal agreement struck with Prime Minister Theresa May, which risks entrapping the UK or parts of it inside the customs union and beneath the EU's legislative umbrella indefinitely if the government cannot satisfy Brussels' demands in the next stage of the negotiations. 

However, the newly-minted UK Prime Minister is insisting it do just that or face an acrimonious 'no deal' Brexit, for which negotiators in Brussels and the Irish leadership will be in line to receive a share of the blame. With the government digging its heels in, Pound Sterling's losses have instensified. 

The fall has seen Westpac, one of Australia's largest banks, forced to walk away from a wager entered into last week that saw the lender looking for the Pound-to-Canadian-Dollar rate to rise back up to 1.6775.

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

"Daily bear trend signals are strengthening again and today’s losses have reached a marginal new cycle low. Absent a swift recovery through 1.66—which looks a dubious prospect—we think risks are tilting back towards the overshoot to 1.57 we had feared following the attainment of the 1.61 bear target outlined following the May/Jun consolidation breakdown," says Eric Theoret, a technical analyst at Scotiabank. 

The Pound has now fallen by 2.9% against the Canadian Dollar in the last month alone and is down more than 8% for the three months to the end of July, a period that coincides closely with that which saw former-PM Theresa May's attempts to have the House of Commons support her withdrawal agreement culminate in her resignation. 

Theoret and the Scotiabank team have been warning of protracted losses for Sterling ever since early June, although they now flag the 1.57 level as a viable target that would put the exchange rate at its lowest level since late 2013. 

"We expect the government’s Brexit by Oct 31 “do or die” approach to weigh on sterling sentiment further as we doubt any real negotiating progress can be made in such a short time frame; this means either a) a no-deal Brexit or b) a confrontation with parliament which will allow Johnson to engineer an early election to try and win a stronger majority," says Sean Osborne, chief FX strategist at Scotiabank. 

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

Failure to agree terms of exit with the EU before October 31 will automatically result in the UK defaulting to doing business with the EU on World Trade Organization (WTO) terms if the Prime Minister does not request another Article 50 extension and if parliament is unable to force a general election before then. 

With ratifying the existing EU withdrawal agreement put to one side, the only ways the UK and EUR can avoid such an outcome are by agreeing an alternative deal or agreeing to extend the Article 50 negotiating window further so that a general election can take place. However, this would open up another can of worms for the Pound. 

With the Labour Party making criticism of government austerity policies the centrepiece of its latest stint in opposition, the UK's main parties could easily find themselves competing to outdo the other's spending pledges.

Such a vote would obviously risk installing opposition leader Jeremy Corbyn in 10 Downing Street, who markets fear almost as much as Brexit, while creating wider scope for another Scottish independence referendum. 

"The fact that a lot of today's selling took place during the Asian session is a rather worrying feature of this decline. At the very least, this makes us quite confident that the pair will test lower medium-term levels in the current cycle," warns Stephen Gallo, European head of FX strategy at BMO Capital Markets

 

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