A strong start to the week for the Canadian Dollar has GBP/CAD on the back-foot but the pair will face its first significant test mid-week when the Bank of Canada delivers their latest policy review.
The Pound to Canadian Dollar conversion is seen at 1.6827 at the start of a new week; the exchange rate opened at 1.6883 suggesting the move lower is well within recent levels.
It would appear that a broad-based sell-off in both the Dollar and Pound are driving foreign exchange market sentiment at the time of writing suggesting short-term bond yields in both the UK and US are falling after weeks of rallying.
The outlook for the Canadian Dollar is however dominated by the Bank of Canada (BOC) policy meeting on Wednesday.
Although no change in the interest rate is forecast, analysts expect the BOC to strike a dovish tone in attempt to talk down rising market borrowing rates.
These have risen steeply in Canada as in most developing countries since the election of Donald Trump.
Unlike the US economy which is surging ahead the Canadian economy is more fragile.
“Those rate developments are all well and good for the US economy, which is closing in on full employment and no longer needs the crutch of ultra-low yields. The bond market is simply doing some of the Fed’s work for it," says Avery Shenfield at CIBC Markets.
“But it’s not in sync with what the Canadian economy needs right now, with our 6.8% unemployment rate masking a much weaker picture in a labour market that is adding part-time work, in lower paid sectors, at the expense of full-time jobs,” says Shenfield.
The trick for BOC Governor Poloz will be to talk down market borrowing rates without actually saying the BOC are going to cut interest rates.
“Having stood pat in October, and seen data slightly top its projections since then, the Bank wouldn’t be able to credibly claim that it seriously considered a rate cut in December,” says Shenfield.
One way of achieving this difficult ‘tight-rope walk’ would be to simply try to directly talk rates down.
“So the Bank will simply have to clear its throat and remind the market that a tightening in financial conditions (i.e., higher bond yields) isn’t welcome, perhaps just by drawing attention to it. Emphasizing that the output gap won’t be closed for a considerable period will be a reminder that there’s still an outside chance of a cut,” says the CIBC analyst.
If this is the tone that is struck then we would expect it to weigh on the Canadian Dollar and allow Sterling to advance further.
Canadian Dollar Vulnerable Versus Sterling
In the previous week, GBP/CAD went nowhere because both currencies strengthened at the same time, canceling each other and resulting in little directional movement.
The Pound rose on hopes of a softer Brexit after comment from Brexit Minister David Davis suggested the UK would be willing to pay to be a part of the single market.
CAD meanwhile strengthened due to a rise in oil prices, which is its principal export and major driver for the currency.
Oil rose 8% as a result of a deal by OPEC to cap supply.
Without the significant boost from an OPEC deal this week, however, we see the Lonnie as vulnerable to weakness versus the Pound, particularly if more commentary suggesting a soft Brexit trickles out.
The currency may face further headwinds from a dovish BOC.
Mixed Technical Signals
The Pound to Canadian Dollar exchange rate has pulled back over the last month after rallying from the October lows.
Overall it remains in a short-term uptrend which is likely to extend higher – we are cautiously bullish short-term.
A break above the 1.6986 highs could lead to move up to a target at resistance at 1.7100.
MACD is still above the zero line indicating the pair is in an uptrend, but it is flatlining, indicating neutral momentum.
Less Bullish View
A more bearish view is held by Scotiabank’s FX Strategist, Shaun Osborne who says GBP/CAD is trapped in a range and longer-term the trend remains bearish:
“This week will see the cross close near where it opened, inside the body of last week’s range—a clearly neutral signal.
“We still view the longer-term GBP sell-off as incomplete at this point.
“The market has not been able to make a new cycle high, even via the rebound from the “flash crash” low, and the broader trend remains clearly bearish (via successively lower highs and lower lows).
“We prefer to sell GBPCAD rallies."
Data for the Canadian Dollar This Week
The main release for the Canadian Dollar is the Bank of Canada Interest Rate decision at 15.00 (GMT) on Wednesday, December 7.
Data for the Pound This Week
A major release for the pound will be Services PMI for November on Monday, December 5 at 9.30 (GMT).
On Wednesday, December 7 at 9.30, there is the release of October Manufacturing Production.
Finally, on Friday, December 9 at 9.30, the Trade Balance for October is Released.