Canadian Dollar Offers Silver Lining to Sellers of GBP/CAD and USD/CAD  

"The trade setup looks relatively appealing as price action for the cross appears to be rolling over just below a key resistance area at 1.6840/50" - CIBC Capital Markets.

Image © Bank of Canada, Reproduced Under CC Licensing

The Canadian Dollar lagged behind other major currencies ahead of the weekend but Statistics Canada's confirmation of a resilient local economy could help to sustain the Loonie's recent outperformance up ahead and may even embolden recent sellers of GBP/CAD and USD/CAD. 

Canada's Dollar remained the top-performer in the G10 grouping for the week on Friday and had outperformed most counterparts in the broader G20 basket also while its prospects may have brightened further in response to a better-than-expected economic data for January and February.

This is after Statistics Canada said the economy expanded by 0.5% in January, more than reversing the -0.1% contraction seen in December, and provisionally estimated a further 0.3% increase in economic output for February owing to resilient activity across a broad swathe of industries.

Today’s outsized move in January real GDP and continued momentum through February leaves little room to equivocate. The Canadian economy started the year on a very strong footing," says Randall Bartlett, a senior director of Canadian economics at Desjardins. 

"But with the recent global banking sector volatility and inflation coming in below expectations in February, there are plenty of good reasons for the Bank to stay on the sidelines for the foreseeable future," Bartlett writes in review of the data. 

Above: Pound to Canadian Dollar rate shown at hourly intervals alongisde USD/CAD. Click image for closer inspection. 

The bar for another increase in the cash rate is high, however, after the BoC announced a "conditional pause" in its interest rate cycle for as long as it takes to observe the full impact of the 425 basis point increase announced for the cash rate over the course of last year. 

"Signs of stress across the global banking sector have provided the BoC some breathing room after upside risks to Q1 GDP threatened to derail its conditional pause," says Andrew Kelvin, chief Canada strategist at TD Securities. 

"Peak rates would reduce housing market concerns but weak NA growth would favor short CAD exposure to European and Asian crosses, like EUR and AUD," Kelvin and colleagues write in a late March forecast review.

The Bank of Canada noted in March that economic growth had been softer than expected in the final quarter and reiterated its expectation that inflation "will come down to around 3% in the middle of this year," leading financial markets to conclude that no further increases in the cash rate are likely.

But the BoC also warned it would "increase the policy rate further if needed to return inflation to the 2% target," and financial markets might not be able to avoid pricing-in that kind of outcome if the Canadian economy remains as resilient as was suggested by Friday's data in the months ahead.

Above: Pound to Canadian Dollar rate shown at daily intervals with selected moving averages. Click image for closer inspection. To optimise the timing of international payments you could consider setting a free FX rate alert here.

That sort of outcome would be supportive of the Canadian Dollar including in relation to the likes of the Pound if its turns out that CIBC stategists are right to expect no further increases in Bank Rate from the Bank of England (BoE). 

"The SONIA curve implies decent odds for additional rate hikes over the coming BoE dates. However, we’re still of the mind that the BoE is likely to be closer to a pause than many think," says Bipan Rai, North American head of FX strategy at CIBC Capital Markets, after tipping GBP/CAD as a sell on Thursday.

"The trade setup looks relatively appealing as price action for the cross appears to be rolling over just below a key resistance area at 1.6840/50," he adds after suggesting that GBP/CAD could fall as far as 1.61 in the months ahead.

Office for National Statistics figures suggested last week that UK inflation rose from 10.1% to 10.4% in February when it had widely expected to fall, although Rai and the CIBC team say that was likely an outlier of an outcome and that price pressures should continue to wane in the months ahead.

This is seen detering the BoE from raising Bank Rate just as a resilient Canadian economy forces the market to abandon current wagers on the BoC being likely to cut its cash rate before year-end, leading CIBC to expect corrective moves lower in GBP/CAD and also USD/CAD up ahead.

Above: GBP/CAD at weekly intervals with Fibonacci retracements of September 2021 downtrend indicating possible areas of technical resistance for Sterling, and shown alongside USD/CAD. Click image for closer inspection.