Canadian pound-dollar rate may struggle to support recovery

– GBP / CAD finds support near key averages around 1.73
– But the recovery could prove difficult to sustain in September
– Positioning, turnover savings, BoC could rely on GBP / CAD

Image © Bank of Canada

  • GBP / CAD reference rate at publication:
  • Place: 1.7330
  • Bank transfer rate (indicative guide): 1.6723-1.6845
  • Specialist money transfer rate (indicative): 1.7174-1.7209
  • More information on obtaining specialized rates, here
  • Set up an exchange rate alert, here

The pound’s exchange rate against the Canadian dollar was little changed in the penultimate session of the week after drawing a line under a treble of earlier losses around the 1.73 handle, but any recovery on hold could prove difficult for the pound to maintain in September. month goes by.

The British pound rebounded convincingly midweek as the Canadian dollar took a break after a resounding rally from the steep losses seen last week, leading the GBP / CAD to rise nearly 1.73 and a level around which there is a collection of major moving averages.

Pound / Canadian dollar losses ran out of steam between the 55-day moving average at 1.7284 and its larger 200-day counterpart at 1.7304, although the pound was unable to distance itself. and these levels Thursday.

“We still believe there is an unrealized fundamental value in the CAD, but the drift of crude oil and narrowing US-Canada spreads (the 2-year yield differential has narrowed to -20bp, or about 9bp narrower than the early July extreme) suggests upside potential as the Canadian dollar is a bit more limited now, ”said Shaun Osborne, chief currency strategist at Scotiabank.

The Canadian dollar was a remarkable underperformance during last week’s massive sell-off in the global market and the accompanying volatility, which briefly raised the pound’s rate against the Canadian dollar to its all-time high. since March, and there are reasons it could remain lackluster in the near term. term.

These include the prospect of a further strength in the US dollar and uncertainty over the outcome of Canada’s election next month, but as September rolls around other factors could favor a rally in the loonie. which would make the situation more difficult for the GBP / CAD pair.

GBPCAD daily chart

Above: Pound rate against the Canadian dollar shown at daily intervals with 55, 100, and 200-day moving averages.

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Specifically for the pound sterling, the exchange rate of the pound sterling against the Canadian dollar is very sensitive to movements of the USD / CAD, both of which have shared a positive correlation recently, and could potentially be under pressure in the markets. weeks to come if the USD / CAD resumed slippage seen earlier this week which was responsible for the GBP / CAD pulling down close to 1.75 on Monday.

“We now think that last Friday was almost surely the peak of the explosion for the pair and the majority of the speculative community is now long on USDCAD. With that in mind, our view is that USDCAD would be a sell off. Interesting at 1.2650 today, if we see it, not a bad sell at the current 1.2630 level, said Greg Anderson, global head of FX strategy at BMO Capital Markets.

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“We could see the USDCAD go down after September 20, even if the elections and the FOMC do not show bearish results on the USDCAD,” Anderson adds.

While there is every chance that the cautious instincts of investors will see them giving the Canadian dollar a big place in the impending election, next month will also bring economic data covering the reopening in Canada from the last ‘lockdown’, this which could also see the market’s attention revert to the outlook for the Bank of Canada’s (BoC) monetary policy with potentially positive implications for the Canadian dollar.

This is especially the case in light of the significant extent to which investors have recently reduced bets on the Canadian dollar.

CAD exchange rate

Above: USD / CAD displayed next to the 200-day moving average and GBP / CAD.

“Since April, the BoC has declined twice and will likely do so again in October and will conclude its quantitative easing program in late 2021 / early 2022 with rate hikes coming in the second half of 2022. The The Fed’s crumbling will also indirectly increase Canadian yields. Says Osborne of Scotiabank.

The Canadian dollar was a popular vehicle at the start of the year for speculators betting on the global economic recovery, although these bets were significantly reduced in the weeks leading up to August 17 and that was before the loonie’s significant fall in the week. last.

The implication is that investors may no longer have much or no positive exposure to the Canadian dollar and they might feel compelled to rebuild this at some point in September or soon after which would be a weight around their ankles. of both USD / CAD and GBP / CAD at the very least.

“Leverage funds were approaching net neutrality in USDCAD ahead of last week’s stop-loss cascade,” BMO’s Anderson said. “The USDCAD has since climbed to near 1.2950 and there have been several rounds of IMM shutdowns. With that in mind, we believe that around 20-30% of leveraged funds’ long interest has been liquidated. It’s hard to know for sure, but we think leveraged funds are likely significantly below the loonie now. “

BMO positioning CAD

Above: BMO Capital Markets chart showing investor exposure to the Canadian dollar in the futures market.

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