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Pound-Canadian Dollar Rate Eyes 1.80 as BoC's Macklem Speaks, Sterling's Big Bid Endures 

- GBP/CAD supported at 1.76 with scope for 1.80 into March. 
- CAD eyes BoC's Macklem for clues on tapering & FX fears. 
- GBP edges higher as bid endures & UK's outlook brightens.
- GBP key to FX reserve recyclers avoiding U.S. Treasury ire.

Above: BoC Governor Macklem. Image © Bank of Canada, Reproduced Under CC Licensing

  • GBP/CAD spot rate at time of writing: 1.7708
  • Bank transfer rate (indicative guide): 1.7098-1.7213
  • FX specialist providers (indicative guide): 1.7443-1.7585
  • More information on FX specialist rates here

The Pound-to-Canadian Dollar exchange rate is supported at nearby levels and could reach one-year highs in the coming weeks amid a brightening domestic backdrop in the UK, although a Tuesday speech from Bank of Canada (BoC) Governor Tiff Macklem will be an important influence on GBP/CAD this week.

Canada's Dollar has risen against low-yielding and safe-haven currencies like the Japanese Yen, Swiss Franc and Euro while ceding ground to other commodity currencies like the Australian and New Zealand Dollars.

It's also continued to be overtaken by Sterling, which remained the best performing major currency of 2021 on Monday, enabling the Pound-to-Canadian Dollar rate to rise by more than two percent for the year-to-date.

The Pound-to-Canadian Dollar rate was back above 1.77 on Monday and has not traded below 1.76 since mid-February. Strategists at Scotiabank wrote last week that it could be on route into a 1.80-to-1.85 trading range, while the lower end of that band could be seen as soon as this week or next.

Beforehand however, both currencies and the GBP/CAD exchange rate must first weather a speech from BoC Governor Tiff Macklem who's scheduled to appear before the Edmonton Chamber of Commerce and Calgary Chamber of Commerce at 17:30 London time on Tuesday.

"Canada’s recent data hasn’t been as rosy as that stateside, and having raised their growth forecast in January, the Governor will want to balance that by emphasizing the long road still ahead in terms of closing the output gap. That communications strategy is going to be of particular importance if the Bank tapers its pace of bond purchases in April," says Avery Shenfeld, chief economist at CIBC Capital Markets. "We have some Fed speeches on tap, and it’s worth watching whether this generally brighter news starts creeping into any slightly reduced dovishness at the central bank. Our bet is that for now they hide any enthusiasm, in order to lean against the climb we’re seeing in bond yields."

Above: Pound-to-Canadian Dollar rate shown at hourly intervals alongside USD/CAD (blue). 

The BoC committed to continue buying "at least $4 billion per week," of Canadian government bonds following January's meeting of the Governing Council in a bid to see Canada's low cash rate passed on to households and companies. The decision came amid a resurgence of coronavirus infections and the reintroduction of lockdown measures that led the bank to warn of elevated uncertainties to its short-term outlook.

"The governor could be asked about strength in the CAD again but we think gains remain largely justified by fundamental developments.," says Shaun Osborne, chief FX strategist at Scotiabank. "Vaccines are still arriving much more quickly than policy makers had expected just a short while ago but Canada is lagging – badly – behind the deployment rates seen in other countries at the moment. Still, the constructive trend in commodity prices overall plus more supportive yield spreads over the USD leave the CAD looking somewhat undervalued at least against the USD and some catch up seems likely. At the very least, upside potential for the USD looks severely limited."

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January's decision came as a surprise in some parts of the market where expectations for a further interest rate cut had crept higher, especially in light of the BoC's earlier complaints about Canadian Dollar strength. The Loonie was near to multi-year highs against the U.S. Dollar at the time and remained around that level early this week, while the short-term economic outlook continued to be plagued by uncertainties relating to vaccine availability; a dampener on an otherwise robust outlook for 2021.

"Keep an eye on the speech by BoC Governor Tiff Macklem, although we suspect he will continue to send a Fed-like cautious message to the market," says Francesco Pesole, a strategist at ING. "We think the time is ripe for USD/CAD to move below 1.2600 – a support that has so far held well."

Above: Pound-to-Canadian Dollar rate shown at hourly intervals alongside USD/CAD (blue). 

Any weakness in the Loonie on Tuesday would aid the Pound-to-Canadian Dollar uptrend, especially if the main Sterling exchange rate GBP/USD goes on to reach 1.43 either this week or in early March. Such an outcome for GBP/USD would see GBP/CAD would rise to 1.80 and its highest level since March 2020, even with USD/CAD at 1.26. But gains would be faster if USD/CAD rises and curtailed in the event that USD/CAD makes it below 1.26. GBP/CAD always closely reflects relative price action in GBP/USD and USD/CAD.

"A clear push under the 1.26 area should reinvigorate downside momentum for USDCAD. Signs that domestic vaccinations are set to pick up amid more vaccine deliveries would lift one of the more obvious drags on the CAD’s performance and perhaps allow the CAD to reach for levels we think are more commensurate with commodity prices and interest rate differentials which are edging a little further in the CAD’s favour. Our estimate is Fair Value for the CAD is near 1.23 currently," Scotiabank's Osborne says.

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Tuesday's speech comes after Canadian retail sales fell by almost twice as much as was expected by economists in January, data revealed last week. If anything this could mean that a cautious tone is likely from the governor. Meanwhile, Sterling's weeks gets underway with its recent raucous bid enduring and as the market looks ahead to a Monday statement from Prime Minister Boris Johnson about a pending unlocking of the economy.

"As portfolio capital flows return to emerging markets and commodity prices continue to firm, further reserve accumulation seems very likely, even as the new US administration steps up surveillance of FX practices among trading partners," says Richard Franulovich, head of FX strategy at Westpac. "A wide range of currencies are likely among the beneficiaries. GBP could see its fair share of renewed reserve manager interest now that hard Brexit risk is in the rear view mirror. China’s Covid resilience and strong recovery could entice flows to CNY. EUR seems ripe for a higher allocation as well."

Above: Pound-to-Canadian Dollar rate shown at weekly intervals alongside USD/CAD (blue). 

Meanwhile, Sterling may be benefiting more than others from a conundrum facing central bank reserve managers who've been accumulating new reserves at the fastest pace for seven years in 2021, according to data from Westpac. This means domestic currencies have been sold for policymaking purposes, in exchange for a Dollar that many still expect to depreciate in 2021.

But with U.S. officials including Treasury Secretary Janet Yellen making clear that Washington has no tolerance for activities that keep the Dollar from depreciating, many of these reserve managers face having to recycle newly acquired Dollars into other currencies, or risk Yellen's ire. The closest substitute or rival to the greenback that has the size to accommodate flows is the Euro, but it's scope to do so is currently limited by the scale of last year's rally.

Many including the European Central Bank, BoC and others complained last year about the U.S. Dollar depreciation and extent to which it lifted their exchange rates, due mainly to fears that rising trade-weighted currencies would reduce import prices and lead to missed inflation targets later on.

The Euro, with its 57% weighting in the ICE Dollar Index and the ECB's preexisting troubles in generating inflation, has been especially problematic; It being unable to rise is tantamount to a scenario where the U.S. Dollar is unable to fall. This is where Pound Sterling and its January-to-February rally comes in.

Above: GBP/CAD at monthly intervals with GBP/USD (blue), GBP/EUR (rred) and EUR/USD (purple). 

The Pound is a large enough currency and the UK a significant enough source of international goods demand to mean that it can deflate the trade-weighted Euro and in the process, create fresh scope for other Euro exchange rates including EUR/USD to rise anew.

When EUR/USD has scope to rise further, reserve managers wherever they happen to be in the world, will have somewhere to park new reserves other than the U.S. Dollar and will no longer run the risk of conflict with the U.S. Treasury.

But the Pound is not quite large enough to do this without a significant rally first. It's far from the most popular explanation, but this could explain more than anything else how a Brexit-battered Sterling went from being a leper of the market as recently as early February, to its outperformer by this week.

Pound Sterling Live believes it's actually witnessed a central bank bid and that it could be likely to take the main Sterling exchange rate GBP/USD as far as 1.43 this week or next. The Pound was already the best performing major currency of 2021 on Monday, but would rise to 1.80 against the Canadian Dollar if GBP/USD reaches 1.43, even with USD/CAD at 1.26. The latter would have to break below 1.26 in order to curtail GBP/CAD's advance ahead of 1.80.

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