- GBP/CAD eyeing a lower range spanning 1.7180-to-1.7317 this week.
- BoE's negative rate affair, USD trend & U.S. bond yield surge in focus.
- USD/CAD supported as yields risk calling time on broad USD sell-off.
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- GBP/CAD spot rate at time of writing: 1.7211
- Bank transfer rate (indicative guide): 1.6618-1.6740
- FX specialist providers (indicative guide): 1.6840-1.7100
- More information on FX specialist rates here
The Pound-to-Canadian Dollar exchange rate has been under pressure thus far in 2021 but the new week sees the Pound Sterling register an advance following five consecutive datys of decline.
The Canadian Dollar joins other 'commodity' currencies in going lower on Monday amidst a retreat in stock markets and commodity prices as global investors turn cautious once more.
"A whiff of risk-off in the air overnight, providing the US dollar with a lift," says Alvin T. Tan, Asia FX Strategist at RBC Capital Markets. "Rising U.S. bond yields are again being named as the chief culprit, plus a possibly overstretched risk rally. The poster child of the current speculative excess, Bitcoin, is down over 11% intraday as of this writing. Commodity currencies are leading the decline in G10 space."
Reasons for investors to be more cautious at the start of the new week include a Covid-19 outbreak in China's Hebei province - which went into lockdown last week - is worsening.
Japan is closed for holiday today, just days after Tokyo entered a second state of emergency amidst spreading Covid-19 cases.
U.S. political risks are not to be overlooked on news U.S. House Speaker Pelosi will table a resolution urging President Trump to be removed from office under the 25th Amendment.
Sterling's longer-term outlook is insured by a now-accelerating coronavirus vaccination drive but a return to 'lockdown' keeps the UK currency under pressure near-term, making it the the worst performing major currency of 2021.
GBP/CAD fell 1.26% last week, from near 1.74 on Monday to around 1.7240 by Friday's close.
Further challenges now lurk on the immediate path ahead for Sterling, beginning with speeches from two Bank of England (BoE) Monetary Policy Committeee members.
First up is Silvana Tenreyro, one of nine rate setters at the BoE, who's set to lead an online discussion about "the transmission of negative interest rates," at 14:00 on Monday before Ben Broadbent speaks at 10:00 on Tuesday.
"Broadbent has so far been silent on the topic. His speech is billed to cover Covid’s impact on the composition of households’ spending, but it would be unusual if he did not offer his thoughts on the MPC’s stimulus options," says Samuel Tombs chief UK economist at Pantheon Macroeconomics. "Pain would be acute for building societies, which are legally required to source more than 50% of their funding from retail deposits. Given these impacts, it is doubtful U.K. lenders would reduce interest rates on new loans much, if at all. By contrast, the MPC can step up the pace of QE swiftly and without harmful side-effects."
Above: Pound-to-Canadian Dollar rate shown at hourly intervals alongside USD/CAD (blue).
Those speeches could bring negative rate fears back to the fore for investors, potentially leading to losses for Sterling, although these may be offset to some extent if Monday's Business Outlook Survey is seen as something that's likely to fuel the Bank of Canada's (BoC) concerns about recent exchange rate strength.
The BoC's survey will be released at 14:30 on Tuesday and while the market indulges either the BoE or BoC, it'll also likely be keeping an eye on the U.S. bond market where a sharp surge in yields prompted investors to take profits on earlier wagers against the U.S. Dollar last week.
GBP/CAD Forecasts 2021
Period: Full Year 2021
FX for Businesses Guide
"There is little domestic data to influence the CAD in the coming week; rather we think markets will focus on US yields and their impact on commodities – where the CAD is seeing a tighter correlation at the moment than stocks," says Shaun Osborne, chief FX strategist at Scotiabank. "We note that seasonal trends typically turn more USD-supportive in Q1 and a rise in US yields/drop back in commodities and stocks might well be the catalyst for a modest correction at least in the weak USD trend."
U.S. yields have surged in 2021 and if the rally continues it could discourage investors from wagering against the U.S. Dollar to the detriment of other currencies. Furthermore, but depending on whether the increases are sustained, rising yields could also induce new investors to buy the greenback.
Above: 10-year U.S. government bond yield shown at hourly intervals and alongside 30-year yield (blue).
The Loonie wouldn't be left unscathed if the U.S. Dollar and bond yields rise further, which is why GBP/CAD could find itself trading a narrow range during the week ahead, despite the risks to Sterling. A range that likely spans the gap between 1.7180 and 1.7317.
Canada is also increasingly facing new virus-inspired closures of businesses and restrcitions on households' activities, although the economy and currency's sensitivity to commodity prices will also be relevant this week in light of developments in the U.S. bond market.
GBP/CAD Forecasts 2021
Period: Full Year 2021
FX for Businesses Guide
Higher yields are a threat to commodities that are mostly denominated in U.S. Dollars and so could potentially be a double-barreled threat to the oil-linked Canadian Dollar.
"Gold prices continue to fall as yields rise and the USD stabilizes," says Sarah Ying, a quantitative strategist at CIBC Capital Markets. "We suspect market correlations will begin to normalize next week, but we are watching carefully to see how the market digests higher yields, given almost a 20bps sell off in UST 30s since the start of the year."
Above: 10-year U.S. yield at daily intervals and alongside 30-year yield (blue). With Fibonacci retracements of 2020 fall.
U.S. yields rallied strongly after last week's Georgia State election handed the Democratic Party a majority in the previously-Republican Senate as investors saw the outcome being likely to lead to even higher levels of government spending and debt issuance.
But yields were also already advancing before the election and with a notable increase after remarks from Federal Reserve (Fed) policymakers suggested that a tapering of bond purchases may come sooner rather than later.
It's because of this that all currencies including the Loonie and Sterling will pay close attention to speeches from Fed rate setters scheduled for this week, which culminate on Thursday in an address from Chairman Jerome Powell to a webinar audience hosted by Princeton University at 17:30 London time.
Yields, the U.S. Dollar and other currencies will also keep an ear to the ground in Washington for clues on the scale and timing of further relief for households.
Above: Pound-to-Canadian Dollar rate shown at daily intervals alongside USD/CAD (blue).
"The USD sell off does appear to have stalled this week," says Scotiabank's Osborne. "USD gains through 1.2740 should see the USD recover a little more ground towards 1.2800/50 in the short run. On the other hand, early week losses below 1.2660/70 would suggest the USD is poised to soften again."
GBP/CAD would fall to 1.7180 in the event that USD/CAD recovered back to 1.2850 and if the main Sterling exchange rate GBP/USD retreated back to 1.3370, a level it's been tipped for by analysts at Commerzbank.
On the other hand, GBP/CAD would trade higher to 1.73 if USD/CAD returns to its earlier low around 1.2640 and GBP/USD trades back to its recent high around 1.37, although this would require renewed U.S. Dollar decelines.
"While higher yields may sweeten the appeal of owning USDs, we still believe in its structural decline longer term, especially as front end yields remain somewhat limited by an inert Fed," says CIBC's Ying. "USD/CAD finds some support at the 1.2630 level tested on January 6, though moves over the last couple of days have been relatively muted...Most of the sensitivity in USD/CAD will continue to be driven by the USD leg."
Above: Pound-to-Canadian Dollar rate shown at weekly intervals alongside USD/CAD (blue).