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RBC Capital's Bet on Pound / Canadian Dollar Slump Torpedoed by OPEC Bickering

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The Canadian Dollar is likely to rise versus Pound Sterling after Wednesday’s OPEC meeting when the oil exporting cartel will probably seal a supply deal.

GBP/CAD is set to fall argue strategists at Canada's RBC Capital Markets.

“We were stopped out of short GBP/CAD last week but it’s a trade we still believe in as we head into the week’s data/OPEC meeting,” says RBC Capital's Currency Strategist, Elsa Lignos in a recent strategy note to clients.

Justifying the bet RBC say they see a deal from the OPEC conference on Wednesday disproportionately supporting the CAD side of the pair (oil is Canada's largest export).

“While oil dipped on Friday on headlines that the Saudis were quitting Russia talks with an OPEC deal no closer, our commodity strategists are sticking to their view that a deal will be done this week,” argues Lignos.

Then there is over-optimism about the outlook for the UK economy, which will eventually be disproved.

“Last week’s Autumn Statement was actually very disappointing for GBP with negligible new fiscal easing – the sharp rise in borrowing is almost all down to lower growth projections,” says Lignos.

A further expression of this is in the elevated expectations for UK inflation in 2017.

“The UK forward curve has an upward bias next year – not quite pricing a hike but drifting in that direction. We think that is fundamentally mispriced,” says Lignos.

The OPEC deal is the game-changer though, and likely to pull the pair lower in the short-term.

“We re-enter short GBP/CAD at a higher level with a tighter stop,” says the RBC strategist.

Said higher level being 1.6837, with said higher stop at 1.6972 and a target at 1.6500.

Unfortunately the bet has therfore failed for a second time as we see the spot level quoted at 1.6771 at the time of writing.

While the trade is dead for RBC the principle behind the argument remains valid until the full outcome of the OPEC meeting are known.

Despite Sterling taking back ground against the Canadian Dollar it is still lower than where it started the week, therefore it could still head lower.

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OPEC Meeting Looks Unlikely to Benefit the Oil Price

Ahead of the Wednesday meeting markets have become increasingly resigned to the fact that any new deal is unlikely.

This may help explain why the GBP/CAD is over 0.7% higher at the time of writing.

"Once again OPEC looks set to disappointment, with a failure to reach an agreement between the key trio of Iran, Iraq and Saudi Arabia meaning tomorrow’s meeting may well be pointless," says Connor Campbell at Spreadex.

It was comments from the Iranian oil minister that first sparked Brent Crude’s 3.5% fall, Bijan Namdar Zanganeh claiming that his country will not accept a cap on its output, with Bloomberg reporting that in turn Saudi Arabia would refuse to sign any deal.

Reuters then claimed that Iran and Iraq have effectively told the Saudis to absorb the output cut on their own; an aggressive stance that surely means that Wednesday Viennese get together is over before it has even begun.


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