- GBP/CAD near Sept highs and vulnerable as Brexit deadline looms.
- Prolonged virus restrictions in Europe a risk to stocks, CAD & GBP.
- GBP risks 1.7121, 1.6989 but would see 1.7415 on CAD weakness.
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- GBP/CAD spot rate at time of writing: 1.7312
- Bank transfer rate (indicative guide): 1.6720-1.6841
- FX specialist providers (indicative guide): 1.7066-1.7170
- More information on FX specialist rates here
The Pound-to-Canadian Dollar rate softened at the start of the week and is at risk of further slippage over the coming days as the Brexit trade talks go down to the wire, but risks to the Canadian Dollar linked to concerns that global risk sentiment will be dented by rising covid-19 infections and political developments in the U.S. could limit the pair's downside.
Sterling gained one percent over the Canadian Dollar last week, lifting it to a 0.24% gain for 2020 as a whole, after an early rally over vaccine developments appeared to be bolstered by the departure of an influential UK government adviser that was said by some analysts to make a trade agreement with the EU more likely.
But confidence in Sterling is being tested on Monday after British negotiator David Frost indicated Sunday that a deal might not be done without the talks first having gone to the wire or even overran this Thursday's deadline.
Thursday's EU leaders' conference is thought to be the final opportunity for a deal to be struck and ratified in European law before the December 31 end to the transition, but with the talks roadblocked on key issues days out from the summit, there's a danger that investors turn cold on Sterling this week.
"The GBP is at risk of quickly unwinding its latest gains soon," says Shaun Osborne, chief FX strategist at Scotiabank. "Expect the USD to nudge slightly higher in the coming week. Our week-ahead model anticipates USD/CAD edging up to 1.3170 within a broad 1.2970/1.3370 range."
Above: Pound-to-Canadian Dollar rate shown at 15-minute intervals alongside USD/CAD (black line, left axis).
Brexit could burden Sterling if Thursday's summit passes without an agreement being imminently on the horizon, vindicating analysts who're looking for GBP/USD to decline back to 1.30 and then 1.29.
This implies a GBP/CAD rate that falls to 1.7121 and then 1.6989 if USD/CAD trades around the 1.3170 indicated by Scotiabank.
GBP/CAD tends to reflect relative price action in GBP/USD and USD/CAD.
"With the USD rejecting this week’s push below 1.30 quite handily and the near-term tone of stocks somewhat fragile as virus cases surge globally and U.S. stimulus talks appear unlikely to make any near-term headway, the CAD seems set to retain a somewhat softer tone at least," Osborne says.
Stock markets could be a saving grace for Sterling this week if they prove unable to sustain last week's post-March highs in the face of increasing and prolonged coronavirus-related restrictions in Europe, which are threatening to extend final quarter economic weakness into the New Year.
Above: Pound-to-Canadian Dollar rate shown at 15-minute intervals alongside S&P 500 (black line, left axis).
The Loonie has the strongest relationship with the S&P 500 among major currencies, which typically enables GBP/CAD to rise as stock markets fall.
"We think COVID is becoming too hard to ignore. FX vols have collapse following the US election, and the curve is fairly flat from here. But we think the market is too complacent," says Mark McCormick, global head of FX strategy at TD Securities. "The risk currencies look particularly vulnerable and we are content with our USDCAD long."
TD Securities is betting USD/CAD rises to 1.35 over the coming weeks as risk appetite is curbed, which would lift GBP/CAD to 1.7415 even if the main Sterling exchange rate GBP/USD falls back to 1.29 at the same time.
Germany warned at the weekend that enhanced restrictions could last throughout winter, echoing similar statements from France and the UK, while Austria announced that it will go into an even stricter form of lockdown on Tuesday that will also see schools close again.
All of Europe's major economies were in some form of lockdown at the weekend, and increasingly the indications are that restrictions will remain through December.
Period: End-2020 - Q3 2021
FX for Businesses Guide
"Our published forecasts assumed a second wave of the virus would emerge in this quarter, and so it has, but it’s admittedly looking more dire than expected. If the upsurge doesn’t flatten soon in the US and Canada, the window in which governments can exercise any real choices will close as hospital capacity reaches is limits," says Avery Shenfeld, chief economist at CIBC Capital Markets. "A negative first quarter in North America looms if we end up in a longer or much broader lockdown."
Brexit, coronavirus restrictions and their impact on stock markets will be the foremost influences on Sterling and the Canadian Dollar this week although analysts and economists will also make time to scrutinise several pieces of economic data that aren't getting the look-in that they once did from currencies.
October inflation, ADP employment data and September retail sales figures are all due from Canada at 13:30 on Wednesday, Thursday and Friday respectively. Meanwhile the UK releases inflation and retail sales data at 07:00 Wednesday and Friday respectively.
"The flash estimate of October retail sales could be the source of news on growth, and we lean towards a soft report there. CPI isn’t likely to be a market mover," Shenfeld says. "It’s the coronavirus, and government policy responses to it, that will likely stay in the sharpest focus."
Above: Pound-to-Canadian Dollar rate shown at weekly intervals.
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