- CAD preferred over USD, GBP short-term
- GBP/CAD unlikely to suffer significant losses
- Canadian oil benchmarks improving, aids CAD
Above: Canadian oil sands. Image © Adobe Stock
- GBP/CAD spot rate at time of writing: 1.7439
- Bank transfer rates (indicative range): 1.6834-1.6950
- FX specialist rates (indicative range): 1.7050-1.7360 >> more information
The Canadian Dollar's gradual trend of appreciation against the Dollar was on full display in mid-week trade amidst broadly buoyant investment conditions and a newfound strength in crude oil prices, while gains against the Pound pushed GBP/CAD back into an increasingly entrenched range.
Oil prices are rising amidst signs that global economic activity is picking up once more with both Brent crude and WTI benchmarks appreciating notably over recent days, and this has in turn aided those countries that are to a decent degree tied to the energy sector, such as Canada.
"Oil markets continue to move higher, with ICE Brent breaking above US$30/bbl yesterday, and settling just shy of US$31/bbl. The strength in flat price has been accompanied by a strengthening in both WTI and Brent time spreads. There has been a real shift in sentiment over the last week, as we start to see a gradual recovery in demand, with the easing of some country lockdowns," says Warren Patterson, Head of Commodities Strategy at ING Bank N.V.
But it is not just Brent and WTI that are on the move, as improvement in Canada's own benchmark oil price is of particular interest.
"Crude’s rebound has added some underpinning to the CAD and, in some way a surprising development perhaps, demand (and pricing) for Canadian heavy crude has risen, driving the WCS differential to WTI to the narrowest since 2008. This may give the CAD a bit more leverage to crude gains, at least for now," says Shaun Osborne, Chief FX Strategist at Scotiabank.
The Canadian Dollar is poised to benefit at the U.S. Dollar's expense when commodity and equity markets are rising, as is currently the case due to an ongoing improvement in investor sentiment thanks to the increasingly entrenched view that the global economy is now on a trajectory to exit the lockdown.
The U.S. Dollar-to-Canadian Dollar exchange rate has faded back to 1.4055, having been as high as 1.42 last week and 1.46 in mid-March, confirming a gentle trend of appreciation for the Canadian unit.
But, for GBP/CAD, improved market sentiment appears to be equally beneficial to Sterling, ensuring a the exchange rate continues to respect the range it has carved out for itself since the covid-19 market panic started to ease in March.
The Pound-to-Canadian Dollar exchange rate has fallen back 1.7439, having been as high as 1.77 last Friday. However, it appears that technical considerations must be respected when approaching GBP/CAD as this high point also marks the top of a broad range that the exchange rate has respected since late March.
GBP/CAD looks to be trading within a range defined by 1.77 at the top and 1.72 at the bottom, and we would expect this range trade to be the dominant theme for the foreseeable future.
Based on the GBP/CAD market's respect for the technical range, we would therefore have a high degree of confidence that the Canadian Dollar's advance will ultimately be limited, and would be surprised if the pair fell below 1.72.
Looking ahead, expect the Canadian Dollar and the broader FX market to take its cue from risk sentiment.
Expectations for the global economy to get back up to speed were underpinned over the past 24 hours after U.S. President Donald Trump has signalled a swift opening up of the U.S. economy is approaching, fearing the economic damage wrought by the shutdown is now becoming too severe to sustain.
"Will some people be affected? Yes. Will some people be affected badly? Yes," Trump said. “But we have to get our country open and we have to get it open soon."
Trump made the comments on a visit to mask factory in Phoenix and he called on Americans to behave as "warriors", noting that even if restrictions are lifted, many will be incredibly wary of getting back to their daily routine.
The 'fear factor' could well be a drag on the economy that lasts well beyond lockdown.
"There’ll be more death," Trump told ABC News. "The virus will pass, with or without a vaccine. And I think we’re doing very well on the vaccines but, with or without a vaccine, it’s going to pass, and we’re going to be back to normal".
Trumps urge to get the U.S. economy onto a recovery footing came as U.S. Federal Reserve Vice Chair Richard Clarida told CNBC that, "unfortunately, the unemployment rate is going to surge to numbers that we’ve not seen probably since the 1940s".
The scale of the unemployment crisis will be laid bare by Friday's U.S. non-farm payrolls, which will be the biggest data event for markets ahead of the weekend. Clarida meanwhile reiterated that the Fed is prepared to use its full range of tools to support the economy, adding there is no balance sheet constraint preventing any further support which should maintain market optimism in the face of daunting data.
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