- GBP/CAD could hold above low at 1.63
- May have scope to test 1.65 short-term
- With USD, U.S. yields lifting USD/CAD
- BoE, Fed speeches, CA CPI data eyed
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The Pound to Canadian Dollar exchange rate has remained buoyant above its early April lows near the round number of 1.63 and could have scope to test or probe above the 1.65 handle this week if USD/CAD rebounds further from last Wednesday’s losses over the coming days.
Canada’s Dollar outperformed all major counterparts within the G10 contingent during the week to Tuesday after April’s Bank of Canada (BoC) monetary policy decision was followed by a slump in the influential USD/CAD rate.
The BoC raised its cash rate from 0.50% to 1% last week, reversing exactly half of the cuts from 1.75% to 0.25% that were announced at the onset of the pandemic, and stated clearly that further increases are very likely ahead.
But this was a widely expected move and in the meantime American government bond yields have risen further, delivering a boost to an already elevated U.S. Dollar and threatening to sustain an upward bias in USD/CAD rate, which is an important influence on GBP/CAD.
“Jim Bullard, President of the St. Louis Fed, introduced the idea of 75bp rate steps yesterday. To ensure that the key rate would reach neutral levels as soon as possible (somewhere in the region around 2½%) and so as to be able to raise it to levels above that,” says Ulrich Leuchtmann, head of FX research at Commerzbank.
Above: Pound to Canadian Dollar rate shown at daily intervals with Fibonacci retracements of late February decline indicating possible technical resistances to any Sterling recovery, and featured alongside spread - or gap - between UK and Canadian 02-year government bond yields. Click image for closer inspection.
Canada’s Dollar is highly sensitive to changes in U.S. bond yields while GBP/CAD often tends to benefit from upward moves in USD/CAD and always closely reflects the relative performances of Sterling and the Loonie when each is measured against the U.S. Dollar.
Hence why directional risks for the Pound to Canadian Dollar rate could now be shifting again following an almost-two month decline by Sterling.
“Front-end spreads continue to flag underperformance in US rates relative to Canada which is helping USD/CAD retain its biddish tone,” says Bipan Rai, North American head of FX strategy at CIBC Capital Markets.
“We continue to see price action remaining within the 1.24-1.27 zone and our target is at the upper end of that range for now,” Rai said on Monday.
GBP/CAD would be likely to trade briefly above 1.65 this week if USD/CAD returns to the 1.27 level unless, in the interim, the main Sterling exchange rate GBP/USD is able to sustain a break beneath the 1.30 handle.
Above: USD/CAD shown at daily intervals with Fibonacci retracements of late February decline indicating likely areas of technical resistance to any further rally, and featured alongside spreads - or gaps - between 02-year and 10-year U.S. and Canadian government bond yields. Click image for closer inspection.
The risk for Sterling and USD/CAD, however, resides in and around Wednesday’s release of March inflation figures because they could potentially lead Canadian government bond yields to close the gap with those in the U.S. and to pull further ahead of those in the UK with implications for GBP/CAD.
“Another strong increase in Canada’s CPI inflation in March will strengthen the case for a second 50bp BoC hike in June in our view (Wednesday). Retail sales for February are also released (Thursday),” says Joseph Capurso, head of international economics at Commonwealth Bank of Australia.
Wednesday’s inflation data would potentially act as a headwind for GBP/CAD and USD/CAD if it leads financial markets to assume there’s a higher probability of the BoC lifting its interest rate by another 0.50% increment again in June, which would take the cash rate up to 1.50%.
Pricing in the overnight-indexed-swap market implied on Tuesday that the BoC’s cash rate is likely to sit around 1.34% in June, indicating that investors perceive barely a 50% probability of another large rate rise being announced in the next Bank of Canada policy decision.
“We do see the need for interest rates to rise further but we’re not on autopilot. We’re not headed to some preset destination for interest rates. We have an inflation target. We don’t have an interest rate target,” Governor Tiff Macklem told reporters in last Wednesday’s press conference.
“If you want a kind of a leading indicator you can look at the quarterly rates of inflation and annual rates, which are in the charts, and what you see is that in the second half of the year those start to come down pretty quickly. That’s certainly something we’ll be watching for,” the governor also said.
Wednesday’s inflation data is the highlight of the holiday-shortened week for the Loonie but both USD/CAD and GBP/CAD could be likely to pay close attention to Thursday’s remarks from Fed Chairman Jerome Powell.
Chairman Powell participates alongside European Central Bank (ECB) President Christine Lagarde in “Debate on the Global Economy” at the Spring Meetings of the International Monetary Fund and World Bank Group in Washington on Thursday.
Meanwhile, Governor Bailey speaks at the Peterson Institute for International Economics’ Macro Week 2022 event on Thursday before delivering a speech about “Inflation Dynamics in a Fragile Global Economy” at the IMF and World Bank event on Friday.
“Financial markets will be looking for any hints as to whether the BoE is more concerned about high inflation or the hit to disposable income from higher energy prices,” CBA’s Capurso said on Tuesday.
“The UK PMIs will be watched closely for a negative impact on economic activity. A weaker than expected reading on the PMIs could push GBP/USD lower. There is downside support for GBP/USD at 1.2975, Capurso and colleagues also said.