Pound-Canadian Dollar Forecast: Recovering 1.75 as Brexit Deal Lightens Sterling's Load

- GBP/CAD eyeing move back above 1.75 into year-end.
- As Brexit trade deal reduces risks, lightens load for GBP.
- With UK parliament set to show its support 'in principle'.
- CAD contends with wobbly oil & faltering risk appetite.

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• GBP/CAD spot rate at time of writing: 1.7445
• Bank transfer rate (indicative guide): 1.6950-1.7040
• FX specialist providers (indicative guide): 1.7220-1.7310
• More information on FX specialist rates here 

The Pound-to-Canadian Dollar exchange rate is back in the upper half of its six-month range and could reclaim the 1.75 handle this week as parliament lightens Sterling's load by giving the nod to Britain's Brexit trade deal, while uncertain risk appetite and holiday market conditions keep the Canadian Dollar in check.  

Canada's Dollar ended its second consecutive week of underperformance Friday although declines against Sterling were the most notable, with the Pound-to-Canadian Dollar rate having reversed an early fall toward 1.71 to end the period 1.12% higher and above 1.74.

But further gains could be likely for GBP/CAD as the agreement on the future of UK-EU relations heads for provisional application on mainland Europe and an 'in principle' endorsement from the House of Commons in London. 

The deal was formally announced Thursday afternoon and its contents not revealed in full until much later, leading to a muted reaction by Sterling, although since this time even some of the most commited Brexit-supporting MPs have indicated or implied they'll give it the nod when asked this Wednesday. 

Indicative approval of the more-than 1,200 page agreement would avert the December 31 Brexit cliffedge that currency markets have often feared in the last four years, while the implementation itself provides for continued zero-tariff and zero-quota trade as well as opportunity for the pact to be adapted over time. 

Clarity over the path ahead permits the main Sterling exchange rate GBP/USD to return to last week's highs above 1.36 and may even facilitate an advance to. 1.37, which would enable GBP/CAD to rise above 1.75. But how far it advances above there depends heavily on the performance of the Canadian Dollar.

"The USD is trading back to near the week’s low and looking fairly soft again. This is not too unusual for USDCAD which typically does see some minor drift into the end of the calendar year (ahead of a renewed squeeze higher in the USD in Q1—from a seasonal point of view)," says Shaun Osborne, chief FX strategist at Scotiabank. "The biggest upside risk for the USD perhaps comes from the risk backdrop at the moment and we think the CAD’s recent gains are broadly in line with fundamentals."

Even with the main Sterling exchange rate GBP/USD up at 1.37, the Pound-to-Canadian Dollar exchange rate would struggle to get far above 1.75 if the USD/CAD rate continues the downward drift it had embarked on late last week.

Above: GBP/CAD at daily intervals. Testing 78.6% Fibonacci retracement of August fall as USD/CAD (blue) suffers indecision.

A GBP/USD rally accompanied by a USD/CAD decline to 1.28 would curtail GBP/CAD near 1.7550, although Sterling's recovery would extend to near 1.76 in the event that USD/CAD instead holds steady around 1.2850 into New Year. 

"USD/CAD eased under 1.2900 on broad USD weakness. We remain bearish USD/CAD but the recent pullback in crude oil prices suggests USD/CAD downside will be by the stairs rather than the elevator," says Elias Haddad, a London-based currency strategist with Commonwealth Bank of Australia. 

The most significant determinant of USD/CAD direction this week, and so gains for the closely connected GBP/CAD pair, will be the extent to which price action is impacted by reduced volumes and thinning market conditions that are typical over the festive holidays. Appetite for risk among the remaining market participants will also be important too.

In this regard, a holdup of Washington's bipartisan financial relief package for companies and households could be a source of support for USD/CAD in choppy and illiquid market conditions on Monday and in subsequent days, especially if it upsets stock markets.

The eagerly-anticipated fiscal relief package finally found bipartisan support in Washington last week but was effectively vetoed by President Donald Trump. A short-lived U.S. government shutdown could now loom as a result. 

"Dollar/CAD continues to hold the top end of Monday’s chart support zone in the 1.2810-30s. February WTI is giving back half of its post-EIA gains from yesterday," says Eric Bregar, head of FX strategy at Exchange Bank of Canada. "Liquidity continues to deteriorate ahead of the Christmas holiday tomorrow and will get even worse when the equity, interest rate and currency futures markets close early at 1pmET today. Canadian markets will be also be closed on Monday in lieu of the Boxing Day holiday."

Governmental measures in response to the coronavirus and new variants of it that are spreading in Europe could also impact on the performance of risks assets like stocks and commodity-linked currencies like the Canadian Dollar in what will otherwise be a quiet week, with no economic numbers of note due from Canada, the U.S. or the UK. This is after October GDP data released last Wednesday indicated a robust year-end finish for Canada's economy, ahead of an uncertain New Year outlook.

"The Canadian economy enters 2021 on a relatively bright note, with industry-level GDP rising by 0.4% in October (market: 0.3%, TD: 0.5%) to beat Statistics Canada's flash estimates for the fifth time over the last six months," says Andrew Kelvin, chief Canada strategist at TD Securities. "However, this provides limited comfort given the more worrying COVID backdrop and new lockdown measures. The post-Christmas lockdowns across eastern Canada will weigh heavily in the new year and raise the risk of contraction in Q1, although policymakers will be weighing this against solid momentum into year-end and a more rapid timeline for vaccine deployment." 

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