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Foreign exchange strategists at Canadian lender RBC are holding onto a trade that pits the Pound against the Canadian Dollar, saying there are further declines ahead for the Pound to Canadian Dollar exchange rate.
The call comes as RBC's Capital Markets division takes stock of a host of tactical and thematic currency trade recommendations as the half way point of 2022 arrives.
They tell clients they intend to hold their view on Pound Sterling underperformance and stay 'short' GBP/CAD.
"We still like this trade, which is currently up around 8%," says Adam Cole, Head of FX Strategy at RBC Capital.
The Pound-Canadian Dollar exchange rate started 2022 at 1.7104 but has fallen in every month of this year to reach 1.5887 at the time of writing.
Above: GBP/CAD at daily intervals.
Cole says the Bank of England is proving unsupportive of Sterling and market participants have scaled back the amount of hikes they expect from the Bank since May's meeting.
In May the Bank said further rate hikes would be needed but pushed back against market expectations by saying they were expecting UK economic growth to crater by the turn of the year.
The Pound sunk in response to the downbeat guidance.
"Since the May MPC meeting, markets have started to price out UK rate hikes relative to the rest of the world, after the BoE slashed its 2023 growth forecast to below zero and its long-term inflation forecast to below target," says Cole.
Cole and his team thinks this process has further to run as the impact of April’s collapse in household real incomes starts to come through in the hard activity data.
The Canadian Dollar is meanwhile forecast to continue outperforming its major peers, with RBC Capital Market saying this consistent with their positive stance on the U.S. Dollar.
RBC Capital's strategists meanwhile note 2022 has been a good year for their trading recommendations, saying both thematic and tactical trading calls have been rewarded.
"A recurring theme of our trade recommendations in recent years has been that years that have been successful for thematic trades have been poor for tactical trades and vice versa," says Cole. "Not so in 2022".
"We have been having a very positive year with short-term tactical trades also," adds Cole, "the simple sum of the returns on our weekly trades (ie assuming no leverage) is 23% - the best since we initiated this portfolio in 2015."