Canadian Dollar’s 2015 Highs Weigh On GBP/CAD as Charts Flag Uphill Struggle

- USD/CAD hits 2015 lows, constraining GBP/CAD
- As commodity price rally & BoC outlook aid CAD
- GBP/CAD charts flag 1.7180 as key to recovery

Image © Bank of Canada

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The Canadian Dollar rose to new six-year highs against its U.S. counterpart on Tuesday as the greenback beat an almost across-the-board retreat from other currencies, including Pound Sterling, in price action that has so-far kept GBP/CAD locked within a narrow and sideways trading range.

Canada’s Dollar climbed above 83 cents against its U.S. neighbour for the first time since 2015 ahead of the mide-week session as USD/CAD fell below 1.2050 following widespread gains for stocks and commodities as well their correlated currencies like the Loonie.

Gains for the Canadian Dollar were not enough however to offset increases in Sterling, which returned to February highs against the Dollar on Tuesday and in the process lifted the Pound-to-Canadian Dollar rate back to 1.71 and an intraday gain of 0.23%.

However, GBP/CAD still has work to do if it’s to break out from the narrow sideways range that has gripped the exchange rate since last week when it began attempting to recover from December 2019 lows seen in the opening days of May.

The Pound-to-Canadian Dollar rate - which always closely reflects the net performance of GBP/USD and CAD/USD - fell to 2021 lows this month amid an outperformance by Canada’s Loonie which itself followed the April 21 monetary policy decision from the Bank of Canada (BoC).

“The underlying trend lower in the cross remains entrenched on the short, medium and long-term oscillators,” says Juan Manuel Herrera, a strategist at Scotiabank. “The GBP really needs to push on through the low 1.71s and regain 1.72+ in order to rally at the moment.”

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

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The BoC’s decision last month to further pare back its quantitative easing programme and to indicate, using its inflation forecasts, that there may be some scope for an interest rate rise from the middle of next year has helped the Canadian Dollar to cement its grip on the top spot in the major currency league table for 2021 in recent weeks.

This currently puts the BoC ahead of all other major economy central banks except Norway’s Norges Bank, and has been widely credited with bolstering the Canadian Dollar’s position in the performance rankings although it had already topped the league table before owing to strong increases in commodity prices.

The combination of rising commodity prices and a comparatively less ‘dovish’ BoC policy stance has leant the Canadian Dollar’s rally a strong fundamental underpinning, which has been instrumental in sidelining GBP/CAD over the last week.

“The daily chart does suggest an inverse H&S-type pattern which lends itself well to the GBP recovery story. However, the trigger remains quite distant (1.7175/80 currently). If there is any validity to the signal, we would expect a push higher to occur sooner rather than later,” Herrera says, of GBP/CAD.

Sterling edged higher against the Canadian Dollar on Tuesday after UK job data emerged better than was expected for the month of March, and as European currencies in general outperformed even commodity sensitive counterparts like the Loonie as UK and Eurozone economies either took their first steps out of ‘lockdown,’ or made further progress in ongoing efforts to reopen.

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GBP/CAD had yet to lift meaningfully above 1.71 however, which is something that would be even less likely if the Loonie continues to set new highs against the U.S. Dollar.

“The USDCAD move has corresponded with ongoing strength in commodity prices, as the BCOM (Bloomberg Commodity Price Index) has risen 0.7% and will close at a new high if it simply stays where it is for the rest of the day. The BCOM remains our rotating financial factor model's #1 factor right now,” says Greg Anderson, global head of FX strategy at BMO Capital Markets.

USD/CAD broke below a major support level at 1.2050 this week, creating scope for a possible fall beneath 1.20 over the coming weeks, although some analysts say the move leaves the exchange rate overextended compared with the levels implied by commodity prices and interest rate differentials.

But with USD/CAD’s downward momentum entrenched and the Loonie remaining on its front foot few if-any observers were willing to call a turnaround for the exchange rate any time soon on Tuesday, which implies an ongoing uphill struggle for GBP/CAD to recover from recent losses.

“Based on the broader set of factors, including the S&P 500 and the 2Y swap rate differential, USDCAD should only be at 1.2255. With that in mind, even though we have been and remain CAD bulls, we struggle to recommend the current moment as a good entry level. At some point there will be a massive pullback (although admittedly it could be a pullback from 1.15 to 1.19),” Anderson says.

Above: Pound-to-Canadian Dollar rate shown at weekly intervals with USD/CAD.