- GBP/CAD finds support near key averages around 1.73
- But recovery may prove difficult to sustain in September
- Positioning, CA’s economy, BoC could lean on GBP/CAD
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- Spot: 1.7330
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The Pound-to-Canadian Dollar exchange rate was little changed in the penultimate session of the week having drawn a line under a hat-trick of earlier losses around the 1.73 handle, but any pending recovery could prove difficult for Sterling to sustain as the September month unfolds.
Sterling bounced convincingly in the mid-week session as Canada’s Dollar took a breather from a firecracking recovery of steep losses seen last week, leading GBP/CAD to turn higher from near 1.73 and level around which there’s a collection of major moving-averages.
Pound-to-Canadian Dollar losses petered out between the 55-day moving-average at 1.7284 and its larger 200-day counterpart at 1.7304, although Sterling had been unable to put distance between itself and those levels on Thursday.
“We still think there is some unrealised fundamental value in the CAD but the drift in crude oil and the narrowing in US-Canada spreads (the 2Y yield differential has eased to -20bps, about 9bps narrower than the early July extreme) suggest upside potential for the CAD is a bit more constrained now,” says Shaun Osborne, chief FX strategist at Scotiabank.
The Canadian Dollar was a standout underperformer during last week’s global market sell-off and accompanying volatility, which briefly lifted the Pound-to-Canadian Dollar rate to its highest level since March, and there’s reason for why it could remain lacklustre in the short-term.
These include the prospect of further strength in the U.S. Dollar and uncertainty about the outcome of Canada’s election next month, but as September unfolds there’s potential for other factors to cultivate a recovery by the Loonie that would make the going tougher for GBP/CAD
Above: Pound-to-Canadian Dollar rate shown at daily intervals with 55, 100 and 200-day moving-averages.
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Most notably for Sterling the Pound-to-Canadian Dollar exchange rate is highly sensitive to movements in USD/CAD, the both of which have shared a positive correlation recently, and would potentially come under pressure in the weeks ahead if USD/CAD resumes the slide seen earlier this week that was responsible for the Pulling GBP/CAD lower from close to 1.75 on Monday.
“We now think that last Friday was almost surely the blowoff top for the pair and that the majority of the speculative community is now long-USDCAD. With that in mind, our view is that USDCAD would be an attractive sell at 1.2650 today, if we see it. It's not a bad sell at the present 1.2630 level, says Greg Anderson, global head of FX strategy at BMO Capital Markets.
“We could see USDCAD move lower after September 20 even if the election and FOMC don't present USDCAD bearish results,” Anderson adds.
While there’s every chance investors’s cautious instincts will see them giving the Canadian Dollar a wide berth the looming election, next month also brings economic data covering the reopening in Canada from the latest ‘lockdown,’ which could also see the market’s attention shifting back to the outlook for Bank of Canada (BoC) monetary policy with potentially positive implications for the Canadian Dollar.
This is especially the case in the light of the significant extent to which investors have recently cut back wagers on the Canadian Dollar.
Above: USD/CAD shown alongside 200-day moving-average and GBP/CAD.
“Since April, the BoC has tapered twice and will likely do so again in October and conclude its QE programme in late-2021/early 2022 with rate hikes coming in the second half of 2022. Fed tapering will also indirectly lift Canadian yields,” says Scotiabank’s Osborne.
The Canadian Dollar was a popular vehicle earlier this year for speculative traders betting on the global economic recovery, although these bets were cut substantially in the weeks to August 17 and that was before last week’s significant slump in the Loonie.
The implication is that investors may no longer have much if-any positive exposure to Canadian Dollar at all and that they could feel compelled to rebuild this at some point in September or soon after, which would be a weight around the ankles of both USD/CAD and GBP/CAD to say the least.
“Leveraged funds were approaching net neutral in USDCAD prior to last week's stop-loss cascade,” BMO’s Anderson says. “USDCAD has since spiked up to nearly 1.2950 and there have been several rounds of IMM stops going off. With that in mind, we suspect that some 20-30% of leveraged funds' long interest was closed out. It's hard to know for sure, but we think that leveraged funds are probably net short of the loonie now.”
Above: BMO Capital Markets graph showing investors’ exposures to the Canadian Dollar in the futures market.