GBP/CAD: Watch USDCAD for Clues to Further Strength
The pound sterling hastraded higher against the Canadian dollar over recent weeks - can the move continue and what drivers should we be looking out for?
The moves have been gradual offering little similarity to the large directional moves we saw in the May to August period.
Indeed, it could be argued that we are witnessing a consolidation in the longer-term uptrend.
Where next for the CAD?
Watch the moves in the USD to CAD conversion for clues on the outlook facing the GBP to CAD conversion. Baked into the USDCAD are a range of drivers such as interest rate differentials and oil price prospects.
Look how the pair have tracked each other since September:
USD/CAD:
GBP/CAD:
The reason the dollar and pound sterling are moving in tandem against the Canadian dollar lies with the interest rate profile facing the US and UK - both are likely to see interest rates rise in coming months.
In a currency environment enslaved to central bank interest rate decision-making we expect the dynamic to continue until at least the first quarter of 2016.
As such, news that the US dollar to Canadian dollar exchange rate will likely trend higher over coming months is significant for moves in the sterling to Canadian dollar.
"We think the Fed is far more likely to implement its first rate hike in either December or January than the market currently has priced in," says Greg Anderson, Global Head of FX Strategy at BMO Capital.
Money markets do not agree with this view but Anderson reckons markets will slowly shift toward his view over the next six weeks.
"As a result, we are looking for interest rate differentials to put upward pressure on USDCAD," says Anderson.
With the Bank of England likely to mimic moves at the US Fed we read this as being a pro-GBP view.
BMO Capital are meanwhile expecting roughly flat commodity prices, so expect oil prices to be a secondary factor for Canadian dollar direction to interest rate differentials.
BMO's FX Strategy team has a 1M target of 1.33.
Latest Pound / Canadian Dollar Exchange Rates
  | Live: 1.8602▲ 0%12 Month Best:1.8915 |
*Your Bank's Retail Rate
| 1.7969 - 1.8044 |
**Independent Specialist | 1.8341 - 1.8416 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
The Canadian bank targets 1.35 at the 3M horizon, which now spans the January BoC and Fed rate decisions along with Q4 US GDP.
Anderson does however acknowledge the possibility of alternative scenarios.
"For example, if China were to announce a major fiscal expansion, then commodity prices would rebound sharply and USDCAD could again take out stops around 1.3000 and perhaps make a quick return to 1.2850," says Anderson.
However, the analyst wouldn’t give that scenario more than a 15% probability.
"We would similarly assign only a 15% probability to the market coming to fully price in a December Fed hike, which we think would push USDCAD to about 1.35," says Anderson.
Given the outlook, BMO Capital's preferred trading strategy for November would be to build a long USDCAD position below 1.3100 with a stop loss around 1.3010.
Traders should look to take partial profit on the long above 1.3300 and full profit around 1.3600.
What does this mean for the pound to Canadian dollar outlook?
We read a move to 1.35 in USD/CAD equating roughly to a move to above 1.21 in GBP/CAD.
