USD/CAD overlooks strong CA GDP data Climbs from 2022 low as USD reboundsLifts GBP/CAD as Sterling also steadiesCIBC buys dip in USD/CAD & eyes 1.27 Scotiabank says to sell GBP/CAD rallies

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The Canadian Dollar stalled during the penultimate session of the week as the U.S. Dollar and Sterling rebounded from earlier declines, rewarding strategists at CIBC Capital Markets who bought the recent dip in USD/CAD just as the Scotiabank team advocates that clients sell rallies in the GBP/CAD pair.

Canada’s Dollar had been an outperformer as the U.S. Dollar declined and the Loonie itself strengthened, leading USD/CAD to a new 2022 low beneath 1.2450 earlier this week, although each of these trends partially reversed on Thursday.

The Canadian Dollar appeared to overlook the details of what was an eighth consecutive month of GDP growth in January as well as Statistics Canada’s disclosure that the economy likely strengthened even further in February as it emerged from its most recent coronavirus-induced restrictions.

“That likely reflects the fact that the market is already pricing in a very quick tightening cycle from the Bank of Canada (to a 2.5% overnight rate by year-end) making it more susceptible to downside surprises rather than upside ones,” says Andrew Grantham, an economist at CIBC Capital Markets.

Above: USD/CAD shown at hourly intervals alongside GBP/CAD. Click image for closer inspection.

One candidate explanation for the above price action comes from already-elevated expectations for the Bank of Canada cash rate, which is likely to rise from 0.5% to 1.25% by the end of June if market-implied measures of expectations are anything to go by.

But the simultaneous release of other data across Canada’s southern border may also partly explain the uplift in USD/CAD and other U.S. Dollar exchange rates, which also had an uplifting impact on GBP/CAD during the Thursday session.

“US personal spending, income, jobs and inflation data all point to a vibrant economy that needs monetary policy to become far more restrictive to get price pressures under control. Combined with recent Federal Reserve official comments, this leaves us with the impression that if the Fed doesn't hike by 50bp at the May FOMC meeting, it never will,” says James Knightley, chief international economist at ING.

“We have a decent growth story, very high inflation and an economy that is set to see its unemployment rate dropping to 3.7%,” Knightley also said Wednesday.

There is, according to many economists, a mounting risk of the Federal Reserve (Fed) electing to lift its benchmark interest rate from 0.5% to 1% in May that was not fully baked into market-implied measures of expectations on Thursday.

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“The market is already pricing in close to 50bps for the April BoC, and June meetings. It’s the same thing for the next few Fed meetings as well. There’s little scope here for a breakout in USD/CAD given the common risks,” says Bipan Rai, North American head of FX strategy at CIBC Capital Markets.

“We expect USD/CAD to be range bound for the coming month. We now see the 1.2400-1.2700 containing price action over that time frame. Given that we’re close to the bottom of this range, we’re establishing a long position,” Rai and colleagues said on Wednesday.

Rai and the CIBC team are targeting a rebound up to 1.27 by USD/CAD during the weeks ahead which, if seen, would have an uplifting or otherwise supportive impact on GBP/CAD that could be likely to draw the attention of the strategy team at Scotiabank.

“Trend signals remain bearishly aligned for the GBP and the drop in the pound below the 2020 and 2021 lows leaves little in the way of a retest 2017/2019 lows on a 1.58 handle,” says Scotiabank’s Juan Manuel Herrera.

“Minor GBP rallies are a sell from a technical point of view. Safe technical ground for the GBP remains distant—we think GBPCAD needs to regain 1.6750 in order to show any sign of more durable technical strength at the moment,” Herrera wrote in a Wednesday review of GBP/CAD’s charts.

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