- GBP/CAD suppressed back near 10-year lows
- May struggle without further retreat from USD
- After GBP/CAD & U.S. Dollar correlation flips
- U.S. data, USD key influences for GBP/CAD
- CAD jobs data & BoE speeches also in focus
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The Pound to Canadian Dollar rate’s mid-June recovery has been all but scuppered and it now risks remaining suppressed near around 1.55 in the days ahead unless market appetite for the U.S. Dollar and other positively correlated currencies ebbs.
Sterling had staged a sharp recovery against the Canadian Dollar in June, which had led GBP/CAD into a brief attempt at rebounding above the 1.60 handle, although this came apart at the seams last week amid a broad strengthening of the U.S. Dollar.
GBP/CAD has historically had a positive correlation with the Dollar Index and USD/CAD exchange rate although that flipped to negative around the middle of April and since then the greenback has risen to multi-year highs, if not two decade highs, against many currencies including Sterling.
Renewed strength in the Dollar pushed the Pound to Canadian Dollar rate back to the round number of 1.55 last week and would be likely to keep it suppressed near to that level unless market appetite for the greenback relents in the days ahead.
“The broad Dollar remains strong, which should support CAD as a member of the 'Dollar-bloc',” says Michael Cahill, a G10 FX strategist at Goldman Sachs, who recommended on Friday that clients continue selling the NZD/CAD exchange rate.
Above: Pound to Canadian Dollar exchange rate shown at 4-hour intervals alongside NZD/CAD.
“CAD historically tends to benefit against other pro-cyclical crosses in a more defensive backdrop of lower equity prices and a stronger Dollar. Energy prices are also expected to continue to outperform (even if spot prices have pulled back), and the BoC continues to send hawkish signals,” Cahill added.
GBP/CAD and NZD/CAD both rebounded from recent lows on Friday after the June Institute for Supply Management Manufacturing PMI hinted of a possible industrial slowdown and was followed by widespread profit-taking in U.S. Dollar rates.
The Dollar has not benefited from recent market disappointments with U.S. economic data including June’s ISM PMI and last week's Core PCE Price Index and so would potentially be at risk from any negative surprise in this Friday’s non-farm payrolls report.
“Payrolls will likely rise at a more modest pace in June, as indicated by a levelling off of the recovery in consumer services. The services ISM and ADP surveys released earlier in the week could give an advance indication of that expected slowing,” says Andrew Grantham, an economist at CIBC Capital Markets.
Above: Pound to Canadian Dollar rate shown at daily intervals alongside Dollar Index and USD/CAD.
“In Canada, employment growth may have been fairly moderate in June, but wage inflation likely accelerated sharply which will keep pressure on the Bank of Canada to enact an even larger 75bp hike at its July meeting,” Grantham said on Friday.
Friday’s dual employment reports are the highlights of the week for the U.S. Dollar and Canadian Dollar but along the way the market will also likely focus this Wednesday on the release of the ISM PMI survey of the services sector.
Wednesday’s publication of minutes from the June Federal Reserve policy meeting is also likely to be scrutinised closely and GBP/CAD would potentially be susceptible to anything in them or the other data that lifts USD/CAD or broader U.S. Dollar Index.
Meanwhile, in the UK Bank of England (BoE) Governor Andrew Bailey announces the latest Financial Stability Report on Tuesday ahead of Wednesday speeches from Monetary Policy Committee (MPC) members Silvana Tenreyro and Huw Pill and a Thursday address from MPC member Catherine Mann.
Above: Pound to Canadian Dollar rate shown at weekly intervals alongside Dollar Index and USD/CAD.