Pound-Canadian Dollar Forecast: Looking Higher as Brexit Fears Ease, Loonie Worries with Stock Markets

-GBP/CAD supported above 1.70 as Brexit hopes rekindled.
-May eye 1.7350 if GBP optimism, CAD weakness continue.
-CAD eyes faltering stocks as BoC speech & jobs data loom.
-While GBP sensitive to Brexit headlines as talks continue.

Image © Bank of Canada

• GBP/CAD spot rate at time of writing: 1.7205
• Bank transfer rate (indicative guide): 1.6550-1.6670
• FX specialist providers (indicative guide): 1.6820-1.7050
• More information on FX specialist rates here

The Pound-to-Canadian Dollar rate edged higher last week as pessimism about the outcome of the Brexit process was tempered, which may continue to support Sterling and could even give it a further lift over the coming days, especially if the Loonie remains an underperformer. 

Political leaders on both sides of the Brexit table have urged negotiators to intensify trade talks over the coming weeks in pursuit of a deal that could be signed off at the mid-October European Council meeting. For the time being, this rules out the prospect of a sudden end to the talks.

Markets had grown concerned that a no deal Brexit was becoming more likely but the mood in London brightened last week, with Downing Street and British negotiators seeing improved odds of a deal being struck. 

"The pound has been buffeted in recent days by headlines regarding the prospects of a Brexit trade deal between the UK and the EU and GBP investors remain focused on this," says Jane Foley, a senior FX strategist at Rabobank. 

British negotiator David Frost acknowledged on Friday that serious impediments to a trade accord do still remain, but said he and others can see the outline of a deal that could be done, which enabled the Pound to recover more of its September losses against a range of currencies including the Canadian Dollar. 

GBP/CAD ended the week at 1.7205 after climbing from 1.7050, which is an area that could offer it support over the coming days if losses in Sterling or a recovery by the Canadian Dollar should lead it back down there. 

“The near-term outlook for the USD and risk assets has been clouded by news of President Trump’s positive coronavirus test. This is important for the CAD as our correlation matrix below highlights the fact that the strongest, positive correlation the CAD has currently is with US equities. We think it is too early to draw too many conclusions about what this means for markets, however,” says Shaun Osborne, chief FX strategist at Scotiabank.

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

“Generally, we expect the USD to retain a firm undertone in the next few weeks," Osborne says. "Our week-ahead model suggests some additional upside potential for USDCAD towards the mid-1.33s."

This week could see Sterling reclaim 1.7350 if analysts are right about GBP/USD testing 1.30 and USD/CAD trades near to 1.3350.

Sterling will be vulnerable to any Brexit headlines that leave its newfound calm looking misplaced, although the Loonie has its own burdens to carry too. Canada’s Dollar underperformed amid losses for oil prices and weakness in stock markets that was triggered by President Donald Trump’s announcement that he's contracted coronavirus. 

President Trump was transferred to hospital Friday and there have since been conflicting reports about his condition, although his physician has described him as suffering mild symptoms while being in good spirits. His illness has placed question marks over the November 03 election timetable and means markets now face up to a 14 day wait before it becomes clear exactly what effect the disease will have on the 74-year old White House incumbent. 

“Shorter-term trend signals are neutral and the GBP’s initial test of the 200-day MA/mid-range resistance in the low/mid 1.72 zone looks to have stalled. With the daily DMI flat and the GBP mid-way between 1.7675 resistance and 1.6750 support, there is little incentive for markets to push the GBP strongly one way or the other at this point. We look for more, neutral range trading here,” says Juan Manuel Herrera, a Scotiabank colleague of Osborne’s.

Above: USD/CAD rate shown at daily intervals.

U.S. stocks tumbled and the Loonie has a positive correlation with them so could suffer if they remain in decline this week. That might offer an additional upside impetus to GBP/CAD.

With Brexit and Trump aside, Sterling’s attention will be on Bank of England Governor Bailey, who’s due to participate in a panel discussion at a European Central Bank event on Thursday at 08:25, and Friday’s GDP data for August. Investors will listen for any comments on the outlook for monetary policy including the possible future use of negative interest rates while consensus is for the economy to have grown by 4.6% in August after a 6.6% expansion in July.

The Canadian Dollar on the other hand, will turn its attention to the Bank of Canada whose governor Tiff Macklem will address the  Global Risk Institute online summit at 13:30 London time on Thursday, ahead of Canadian jobs data that’s set for release at the same time on Friday.

“We remain of the view that the BoC will remain the least dovish central bank in the G10 commodity space and we therefore do not expect any clear dovish tilt in Macklem’s words,” says Francesco Pesole, a strategist at ING, who has a neutral outlook for USD/CAD this week. “We expect a less pronounced increase in hiring compared to August, although a decrease in the unemployment rate should be welcome and keep CAD’s fundamentals relatively attractive.”

The BoC has said that it’ll continue buying "at least $5 billion per week of Government of Canada bonds," through its quantitative easing programme until  "economic slack is absorbed"  the economy as well as labour market make it back to the dry land they were on before the onset of the pandemic. That labour market will be in focus at the BoC and in the market Friday.

“USD/CAD is finding support at the 1.3278/80 level for now. Price action is expected to remain moribund as campaign season continues in the US. The next big risk for price action is the BoC meeting in late October where we expect the Bank to calibrate its QE program. We continue to like CAD on the crosses versus the NZD and AUD,” says Bipan Rai, North American head of FX strategy at CIBC Capital Markets.

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