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- GBP retains initiative on charts with solid support at 1.7070 area.
- GBP charts point to gains ahead, but election polls to fresh losses.
- Support for Conservatives has ebbed broadly, poll-watcher says.
- As CAD faces BoC rate decision and November employment data.
- Any hint of rate cuts ahead to weigh on CAD as market unprepared.
The Pound-to-Canadian-Dollar rate is tipped by technical analysts to remain supported in the days ahead, although an apparent ebbing of support for Prime Minister Boris Johnson's party in pre-election opinion polls could mean the British currency is vulnerable to losses early in the new week.
Sterling gained almost half a percent on the Canadian Dollar and other currencies last week, making it the second best performer among major currencies, but finished on a softer footing Friday.
This was after being resecued aided by YouGov predictions of election victory for Prime Minister Boris Johnson. The Pound is now up 8.85% from its early-August lows beneath the 1.59 handle and has been tipped to remain well supported close to its current levels in the days ahead.
"GBP/CAD continues to test a key resistance level around C$1.72, near 7-month highs," says George Vessey, a strategist at Western Union. "Up 2.5% since this time last month, GBP/CAD remains in an upward trend channel with support around the C$1.7070 zone likely to be a tough nut to crack."
Above: Pound-to-Canadian-Dollar rate shown at hourly intervals.
Canada's Dollar has risen against every one of its major rivals in 2019 but only held a 1.46% gain over Sterling on Friday and has been tipped for weeks now to slowly but surely cede further ground to the British currency in the weeks ahead. Technical analysts at Scotiabank, one of Canada's largest lenders, have been flagging for weeks the still-live prospect of a 4% rise in the Pound-to-Canadian-Dollar rate in the short-term.
Scotiabank's Juan Manuel Herrera said earlier in November the Pound was enjoying a bullish alignment of trend signals on the intraday, daily and weekly 'directional-movement-indicators' and that this will initially lift the exchange rate to 1.73-1.74, before eventually taking it up to 1.78. And last Thursday noted the exchange rate remains above its nine and 21-day moving-averages, which is typically a buy signal, while 'directional-movement-indicators' on the charts were also tipping Sterling as a buy.
"Pro-sterling sentiment has waned over the last week as markets take note of a possible narrowing of the Conservatives’ lead in the polls over Labour,” says Shaun Osborne, chief FX strategist at Scotiabank. “A lead of ten-plus percentage points with two weeks until the election may very well lock in a Tory majority and give a boost to the pound. On the other hand, sterling may post a significant loss if the poll puts the Labour party within 8 or fewer percentage points from the Conservatives.”
The Pound-to-Canadian-Dollar is a 'cross rate' that can be calculated at a basic level by dividing GBP/USD over CAD/USD, which means both the latter exchange rate outlooks can impact on the trajectory of Sterling relative to the Canadian Dollar. Some analysts are increasingly looking for the GBP/USD rate to weaken in the days ahead although much also depends on price action in the CAD/USD rate, which will be impacted by the looming Bank of Canada (BoC) interest rate decision on Wednesday.
"We do expect a bit more of a wash in CAD positioning, leaving it biased to trade lower. It's not extreme but we think there's wood to chop there," says Mark McCormick, head of FX strategy at TD Securities. "We don't think this event offers a game-changer for the well-established 1.30/1.33 range in USDCAD. We're likely to retest the recent highs of 1.3350, though we think this level holds again. The result is another top to fade, reinforcing the existing range."
Above: Pound-to-Canadian-Dollar rate shown at daily intervals.
Pound Sterling: What to Watch
The Pound rose against most of its major rivals last week after being boosted earlier by YouGov projections suggesting Prime Minister Boris Johnson is on course to win a solid majority in next month's election, but it enters the new week at risk of declines.
Sterling is expected to continue taking its cues from election headlines this week, although they may have turned negative for the British currency over the weekend with polls having shown support for Prime Minister Boris Johnson ebbing less than a fortnight away from the December 12 vote. Support for the opposition Labour Party has risen and helped close some of the gap between the two, bringing Johnson's lead down notably with some pollsters.
2 weeks ago I asked if Labour were about to press the panic button. But now it might be the Conservatives.— Matthew Goodwin (@GoodwinMJ) November 30, 2019
Their lead is down with BMG (-7) Kantar (-7) Opinium (-4) Survation (-3) ICM (-3) Panelbase (-2) & YouGov (-2)
Either the polls are wrong or the squeeze is on#ge2019
The apparent ebbing of momentum comes with analysts suggesting the Pound is running out of road and that further upside will require an actual Conservative Party victory at the election. However, and as always, there were some polls that showed support for the Conservatives rising.
It's not clear what markets will make of the various polls once all is said and done although given Sterling's sharp gains in recent weeks, it might be more sensitive to bad news than good.
"Despite the growing likelihood of a Conservative majority, sterling has only edged higher in recent weeks. We think that the pound could rise further if the party wins a majority, but that its stance on Brexit limits the upside for now," says Oliver Allen at Capital Economics, in a note to clients last week.
Currency markets favour a Conservative government because its manifesto would negate the threat of a 'no deal' Brexit and, some say, enable the economy to move on from the current stage of negotiations that has paralysed the Bank of England and some businesses.
Another part of the bias comes from fears about the opposition Labour Party, whose economic and political agenda could send the Pound as low as 1.20 against the Dollar if the party wins the election, according to Capital Economics.
"Two of the three probable outcomes, a Conservative Party majority or an alliance of parties that favoured a second referendum, point to GBP upside while a hung parliament would point to a sharp decline. Although the scale of the downside move is potentially large, we think the probability we would attach to a hung parliament outcome is far outweighed by the other two possibilities. On balance, it points to GBP upside," says David Bloom, global head of FX research at HSBC. "Nonetheless, although we think a higher GBP is the more probable path based on the evidence of the current polls, if we are wrong, the downside could be greater than the topside."
There are no major economic figures expected in the week ahead although IHS Markit will releases its PMI surveys of the services, manufacturing and construction industries, although the importance of them has been reduced by the addition of the new 'flash' surveys to the calendar toward the end of each month. November's flash PMI pointed toward another contraction in the final quarter for the UK economy.
The Canadian Dollar: What to Watch
The Canadian Dollar failed to find inspiration last week in official figures that showed the economy meeting both BoC and market expectations for last quarter, and it's possible the Loonie could remain on the defensive this week.
December's BoC interest rate decision due at 15:00 on Wednesday is arguably the headline event of the week for the Canadian Dollar and although markets are looking unanimously for it to leave the cash rate unchanged, the decision and accompanying statement could weigh on the Loonie both before and after its release. Investors will also get November labour market data on Friday at 13:30, although the BoC will set the direction through most of the week.
"The BoC will perhaps be a little less concerned but with the US economy set to slow further, not yet enough evidence of a turnaround in global growth and trade uncertainty persisting, the message will broadly remain the same. So upside CAD potential will be limited post-the BoC decision and we still reason for CAD underperformance further ahead," says Lee Hardman, an analyst at MUFG.
BoC policymakers have blown hot and cold on the outlook for Canadian interest rates in recent weeks. In October the bank said the "economy's resilience will be tested" in the coming months, while Governor Stephen Poloz told an audience at the Ontario Securities Commission that current Canadian interest rates are "about right" on November 22.
However, and between all of that, Deputy Governor Carolyn Wilkins led markets to believe a cut might be imminent.
The BoC is expected to begin prising open the door that stands between it and an initial 'insurance' cut that would take the cash rate down to 1.5% in the weeks ahead, which could weaken the Canadian Dollar because markets currently see little chance of a cut coming much before the end of 2020. The overnight-index-swap-implied cash rate for January 22 was 1.68% on Friday, far above the 1.5% level that would prevail in the wake of a standard rate cut.
"There will be enough in the communication to leave open the prospect of easing in H1 2020. The resilience of the Canadian economy will surely be tested given slowing growth in the US and globally. CAD is unlikely to rebound any time soon and the year-to-date outperformance of CAD could be on the cusp of turning into a period of under-performance. Leveraged positioning looks excessively long to us and could undergo a liquidation," Hardman says.
Markets do not currently fully price-in a rate cut to 1.5% until late next year but some analysts are mindful the BoC might open the door to a cut as soon as the January meeting. Any hint of that on Wednesday would send those market-implied rates lower along, likely taking the Canadian Dollar down with them.
Canada's Dollar has risen against every one of its major rivals in 2019 but only held a 1.46% gain over Sterling on Friday and has been tipped for weeks now to slowly but surely cede further ground to the British currency in the weeks ahead. It's been boosted by an outperforming economy that's enabled the BoC to leave its cash rate unchanged even as the Federal Reserve next door and other central banks around the world have cut their interest rates.
The BoC had forecast a 1.3% expansion for the last quarter and Friday's GDP report not only hit that number on the button, but also produced some upside surprises in some of the individual components of GDP. That could be said to impair any arguments in favour of a BoC rate cut over the coming months, although the Canadian Dollar was clearly unimpressed by the figures.
"Our conviction level on USD-CAD moving higher is less this month than last. We saw little reason for a break below 1.30 but at 1.33 the balance of risks is a little more even. It is possible USD-CAD is settling into a 1.3000-1.3350 range, but in the end we expect the BoC to open the door sufficiently wide to a January 2020 rate cut to prompt a break-out higher," says Daragh Maher, Americas head of FX strategy at HSBC. "Weakness in the CAD is likely to persist into year end. The main point of focus is likely to remain the Bank of Canada."
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