Pound-Canadian Dollar Rate Hits One-month Lows amid Oil and USD Rally 

A single oil pump jack in the farm field. Calgary, Alberta, Canada. Image © Adobe Stock

  • GBP/CAD spot rate at time of writing: 1.7501
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The Pound-to-Canadian Dollar rate tumbled to one-month lows Friday amid rallies in the U.S. Dollar and oil that have given Canada's Loonie an advantage over Sterling and prompted CIBC Capital Markets to suggest that clients of the bank consider betting against GBP/CAD. 

There was little to distinguish between Sterling and the Australian Dollar as both vyed for bottom of the bucket, while the Loonie was unchanged against the greenback and a comparative outperformer for the session. 

The Oil-linked Canadian Dollar and Norwegian Krone were the only currencies to put up a fight on Friday against a resurgent U.S. Dollar, which has risen alongside U.S. government bond yields that have surged these last few weeks back to levels not seen since before the pandemic. 

U.S. Dollar gains are said to reflect the closure of investors' wagers against it rather than expectations of an ongoing outperformance. 

"The USD is firmer as shorts are exited. EMEA FX is holding up reasonably well along with a few oil proxies," says Bipan Rai, north American head of FX strategy at CIBC Capital Markets. "WTI prices in the neighbourhood of $64-65/bbl imply that USD/CAD should really be close to and below 1.25. The CAD should be a lower beta amongst its traditional peers in the period ahead. Short GBP/CAD looks like a nice play below the 1.7570 area." 

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

Despite widespread declines in stock markets across the globe, weakness in other commodity prices and the aforementioned U.S. Dollar strength, major oil benchmarks were on course Friday to end the week with gains of around 7%.

Gains are supportive of the Canadian Dollar as well as the currencies of other oil exporters, and were instrumental in CIBC's move this week to tip GBP/CAD as a currency pair worth selling if and when it breaks below 1.7570. 

GBP/CAD fell below both the 1.76 and 1.75 handles on Friday, taking it back to levels that last prevailed around the beginning of February and before the latest interest rate decision from the Bank of England (BoE) seemingly encouraged investors to adopt a less pessimistic view of the British currency. 

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GBP/CAD traded as high as 1.7892 in late February before falling in the final week and eventually coming undone during early March. Strategists at CIBC may now be keen to bet against Sterling, although others may choose to wait and see if it can hold onto the 1.75 level through the week's close.

"Swings took the GBP outside of both the ceiling and the floor of the narrowing range we noted last week which has perhaps warned of the GBP rally losing momentum. We think it is too early to conclude that the GBP is poised to fall significantly. Risks may have tilted towards weakness but still bullish oscillator readings suggest limited downside," writes Juan Manuel Herrera, a strategist at Scotiabank, in a Monday note. "We look for support around 1.75."

Oil price gains and Canadian Dollar resilience follow an Organization of Petroleum Exporting Countries (OPEC) agreement to extend curbs on the cartel's supply of global markets. Some observers had anticipated a production increase would follow the meeting of member countries' ministers. 

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

"Saudi Arabia shrewdly fed bullish information to the oil market in order to maintain the recent positive price momentum and speculative buying interest," says Ryan Fitzmaurice, a senior commodity strategist at Rabobank. "Assets under management (AUM) at “long-only” commodity funds are increasing quite rapidly while the assets held at CTA funds dwindle to multi-year lows. This widening allocation of capital between “long-only” commodity funds and CTA funds has large implications for oil futures prices 

The U.S. Dollar rally and any position clearing or 'short covering' by investors comes amid a sharp rally in American yields that has lifted the 10-year yield to within inches of pre-pandemic levels and at a pace that may have been at least partly responsible for unravelling stock markets this last week and month. 

Canada's TSX Composite index was down on Friday, had risen only 0.10% this week and was still carrying a -0.3% loss for the month while all major U.S. benchmarks were lower over each horizon. European stocks were a more mixed picture, although none outpaced London's mostly U.S. Dollar-earning FTSE 100.

Crashing and banging grew louder overnight and into Friday's European morning after Federal Reserve (Fed) Jerome Powell indicated in the earlier session that he and the bank see the surge in bond yields as merely reflecting an economic recovery in motion, although such an approach could have longer-lived implications for the U.S. Dollar.

"With a clear 'growth story' for the US economy and long-term rates continuing to adjust, we think it's safe to conclude that the USD's carry profile is steadily evolving," says Stephen Gallo, European head of FX strategy at BMO Capital Markets. "Adjustments could be precursors of future US debt inflows, particularly if investors judge that the Fed will implement a 'yield cap' at some stage (i.e. non-resident investors will lock-in the higher YTM on the bonds, the price appreciation from Fed's purchases, and any additional appreciation in the USD). For the time being, we also judge that investors are in the process of weighing various reward-for-risk profiles in emerging markets (vis-a-vis the US market)."

Above: Correlation coefficients for major exchange rates during the one month to March 05. Source: NinjaTrader LLC.  

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