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Pound-Canadian Dollar Week Ahead Forecast: Potential for Downside

-GBP risks unravelling as CAD outperforms and Brexit risks mount.
-After London warns of exit from Brexit talks, CAD pares earlier loss.
-CAD an outperformer since USD bottomed out in early September. 

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  • GBP/CAD spot rate at time of writing: 1.7058
  • Bank transfer rate (indicative guide): 1.6460-1.6580
  • FX specialist providers (indicative guide): 1.6675-1.6904
  • More information on FX specialist rates here

The Pound-to-Canadian Dollar exchange rate narrowly avoided a bearish close beneath its 200-week moving-average last week but the mounting threat of a 'no deal' exit from the Brexit transition period, combined with nascent Canadian Dollar outperformance, could yet see Sterling come undone in the days ahead. 

Brexit risks to Pound Sterling are mounting and at the very least that could mean the British currency is likely to underperform many of its rivals including the Canadian Dollar, which has been an outperformer since early September when the U.S. Dollar Index bottomed out. 

Canada's Dollar had been an underperformer in the summer months when the greenback was under pressure, potentially because of its postion close to and resulting links with the U.S. economy, which might now stand it in good stead relative to other major currencies as the November U.S. election draws near.

That, if nothing else, could mean USD/CAD upside is less than the downside potential of GBP/USD and other U.S.-facing exchange rates, which would leave the Pound-to-Canadian Dollar rate vulnerable to declines even without the soured Brexit trade talks. 

Above: Pound-to-Canadian Dollar rate shown at daily intervals with selected moving-averages. 

"We reiterate that for us, we see 1.3200 as a good entry point for new shorts. The move in USDCAD is almost perfectly aligned with the USD index move and CAD's 'beta' relative to BBDXY," says Greg Anderson, CFA and global head of FX strategy at BMO Capital Markets. "We do admit, though, that if Brent were to break below $40 (from $42.50 now) that USDCAD would break at least a big figure higher, so that is a key risk associated with being short-USDCAD."  

GBP/CAD was volatile last week before closing Friday with a 0.44% loss that left it 0.45% lower for the period, with declines building after Prime Minister Johnson said that preparations for a trade relationship "more like Australia’s" are to be ramped up.

This means the British government is preparing for a life without any preferential trade agreement with EU countries which, if not a source of downside for all Sterling exchange rates, could certainly be enough to ensure it cedes fresh ground to a currently-outperforming Canadian Dollar. 

Above: USD/CAD rate shown at daily intervals alongside Dollar Index (black line, left axis). 

USD/CAD rallied to 1.3250 last week but was quick to draw new sellers, and is expected by many analysts to remain downward biased over the coming days, which is a bearish sign that puts a heavy onus on GBP/USD to avert declines in the Pound-to-Canadian Dollar rate.

"The Canadian dollar has shown better resilience than other high-beta G10 currencies to the drop in global risk appetite this week. We continue to see CAD’s fundamentals as more attractive than AUD’s and NZD’s especially in light of rising RBA and RBNZ easing bets and China-Australia tensions," says Francesco Pesole, a strategist at ING. "The data-flow next week should further support CAD’s resilience as the BoC Business Outlook may underline how the Canadian’s economy regained momentum in 3Q."

The Pound-to-Canadian Dollar rate always closely reflects the relative performance of GBP/USD and CAD/USD, but many analysts are now turning bearish on Sterling, looking for declines to 1.27 and potentially as far as 1.2250 in GBP/USD.

Above: CAD/USD shown at daily intervals alongside S&P 500 index futures (blue line, left axis). 

"The two parties will likely end up with some kind of framework for future cooperation and continue negotiations on the back of such over the coming years," says Martin Enlund, chief FX strategist at Nordea Markets. "They could in essence sign a framework agreement, Australian style, that includes very fluffy principles on trade, but that would in practice resemble a postponement of the free trade agreement in all but name (read, temporary WTO trade rules to apply in 2021). GBP, EUR and CAD are three of the most vulnerable currencies, should Boris Johnson pull the rug from under the negotiations."

Even if USD/CAD rose in the week ahead, any fall toward 1.27 in GBP/USD would risk pushing the Pound-to-Canadian Dollar rate back below the 1.68 handle while any actual 'no deal' Brexit could see GBP/CAD falling as far as 1.62. However, USD/CAD declines would exacerbate falls in GBP/CAD.

"The FX market has become something of a one trick pony again, with virtually all movement dictated by the risk backdrop. The CAD has been less influenced by domestic data and relative data surprises between the US and Canada and that trend seems set to persist," says Shaun Osborne, chief FX strategist at Scotiabank. "Our week-ahead model looks for a bit more lift in USDCAD towards 1.3240/50 around a wide 1.3050/1.3430 range."  

Above: Pound-to-Canadian Dollar rate shown at weekly intervals with, recovering above 200-week average on Friday. 

"We spent weeks or months getting to the point where restaurants, bars, and gyms could reopen in places like Montreal, Toronto and Brooklyn, but it wasn’t long before health authorities judged it necessary to close them again. That will have economic consequences in Canadian data for October and November," says Avery Shenfeld, chief economist at CIBC Capital Markets.

Both Canada and the UK have seen coroanvirus-related restrictions on acitivity tightened over recent weeks in response to a second wave of coronavirus infections that's threatening economic recovery. But similar is true of other European economies while Australia and New Zealand both also saw restrictions tightened and economic rebounds undermines back in the summer. Given the wide geographical spread of new restrictions, it's not clear that there'll be any implication for GBP/CAD just yet. 

Sterling will be most sensitive to any suggestions that there might after all be some chance of a Brexit trade deal being agreed by year-end, but would risk coming undone in the absence of such developments. Meanwhile, the Canadian Dollar will be most sensitive to the trajectory of U.S. stock markets but will also take cues from oil prices as well as Tuesday's Business Outlook Survey from the Bank of Canada. Inflation data and retail sales numbers due out on Tuesday and Wednesday might also have an impact too.

"We doubt that the Bank of Canada’s outlook survey has much value, not only because respondents can’t know what’s in store from Covid, but also because with different parts of the economy following such divergent paths, a modest sample of firms might not be very representative of the true weighted average outlook," Shenfeld says.

 


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