- GBP/CAD supported & drawing bidders above 1.73
- May see 1.75 if USD/CAD extends correction higher
- USD picture key after BoC jilts ‘hawks,’ oil wobbles
- GBP aided by possible BoE shift on QE, reopening
Image © Bank of Canada
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The Pound-to-Canadian Dollar rate entered the new week with Sterling and the Loonie still vying with each other over the top spot among major currencies for 2021 but could potentially reach its highest since late April over the coming days if USD/CAD continues its correction higher.
Sterling was caught up in a wave of profit-taking ahead of the weekend but entered the new week on its front foot and with the Pound-to-Canadian Dollar rate again testing the 1.74 handle while the Loonie itself stood on the verge of another leg lower.
The Pound-to-Canadian Dollar rate has risen decisively above 1.73, a level which has since been flagged as a worthwhile buy-on-dips area, and in the process cemented its breakout from a narrow two-month trading range.
However, the Pound could go further and as far as a short distance above 1.75 over the coming days, especially if last week’s Bank of Canada (BoC) policy decision continues to leave a sour taste in the mouths of investors and a six-week advance by the U.S. Dollar continues.
“With Covid-19’s delta variant rampaging, where are we really on ‘Freedom Day’? There is furious debate, but the key data to watch are arguably from the UK and Israel, the two most vaccinated countries,” says Michael Every, a global macro strategist at Rabobank.
“For now, a risk-off mood leaning towards the USD and long duration in bonds clearly prevails. Where next depends on what you think the world looks like at the end of this war, and how much freedom any asset class will actually have,” Every adds.
Supporting Sterling is the final stage of a previously delayed economic reopening that goes ahead as of Monday, and the perceived scope by the market for a potential Bank of England (BoE) decision over coming months to put an early end to its quantitative easing programme.
Above: GBP/CAD at daily intervals with 200-day average & Fibonacci retracements of late April decline.
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Pound-to-Canadian Dollar rate gains would not have been nearly as large however if not for the market response to last week’s BoC decision, earlier and ongoing declines for oil prices as well as the trajectory of the U.S. Dollar, which GBP/CAD tends to follow.
“We continue to view the steps taken by the BoC as in-line with expectations, but a slight disappointment relative to the slight possibility that the Bank could have accelerated its timeline for tapering and ultimately ending its bond purchase program but did not,” says Greg Anderson, global head of FX strategy at BMO Capital Markets.
“Given market positioning, with some leveraged FX investors still trapped in long CAD positions against the USD and along crosses (like CADJPY), we don't entirely rule out a breach of 1.2650 and a further extension all the way up to 1.2800,” Anderson says.
The Canadian Dollar has been ceding its spot as the best performing G10 currency of the year back to the Pound since last Wednesday after the BoC stuck announced a widely anticipated reduction of its weekly government bond purchases but said nothing to encourage expectations of a quickening in the pace of its tapering action, and nothing to vindicate market expectations that it would lift interest rates by June next year.
Oil price declines have however also been instrumental in lifting USD/CAD tentatively above its 200-day moving-average around 1.2624, which risks placing it on a path to the 1.28 handle warned of by BMO’s Anderson, which would see the Pound-to-Canadian Dollar rate trading above 1.75 even if the main Sterling exchange rate slipped all the way back to April lows around 1.37 as some analysts have flagged that it will over coming days or weeks.
“Over the next three months, upside risks to the US Dollar could limit progress towards our 3-month forecast for USD/CAD of 1.22. However, we still think CAD should outperform on crosses for two primary reasons,” says Zach Pandl, co-head of global foreign exchange strategy at Goldman Sachs.
Above: USD/CAD shown at daily intervals with 200-day average & Fibonacci retracements of late April decline.
“Firstly, our commodity strategists continue to see upside to oil prices on a shift from demand to supply pressures which should push Brent towards their $80/bbl summer forecast, with risks skewed $2-4/bbl toward the upside. Secondly, our policy rate forecasts imply a widening of rate differentials between Canada and most of its G10 peers that should benefit CAD,” Pandl adds.
Despite the Pound’s recent success and the Canadian Dollar’s nascent declines many analysts say the Loonie is likely to recover its footing before long, which is one reason for why any GBP/CAD rally above 1.75 could prove to be difficult to sustain and ultimately short-lived.
However, and for the short-term at least the U.S. Dollar has turned higher in what is a headwind for the Loonie and the Pound potentially stands to benefit in the coming weeks if BoE policymakers continue to suggest that changes to its quantitative easing programme or other policies are likely.
The BoE will be in focus for Sterling again this week with a number of Monetary Policy Committee members set to air their views on the recent performance of the economy and outlook for its recovery, while for the Canadian Dollar May retail sales figures are out on Friday at 13:30 and form the highlight of the week.
“In Canada, the effects of the third wave foretell a drop in May retail sales, in line with Statistic Canada’s advanced estimate. The flash reading on June activity should show a rebound as the reopening took hold, but spending will be increasingly focused on services that are reopening in the months ahead,” says Katherine Judge, an economist at CIBC Capital Markets.
Above: Pound-to-Canadian Dollar rate shown at weekly intervals alongside USD/CAD.