GBP/CAD ceding 1.70 amid fallout over UkraineRisks slide near 1.68 if BoC surprises hawkishlyLiftoff priced-in but quick resort to QT possibleCould bolster CAD yields & weigh on GBP/CAD

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The Pound to Canadian Dollar rate slipped below 1.70 during the opening half of the week but would be at risk of further losses toward the 1.68 handle if the Bank of Canada's (BoC) March monetary policy decision puts fresh wind in the sails of the Loonie.

Sterling was close to the worst performer within the G10 contingent for the week to Wednesday as currencies around the European continent continued to bear the brunt of a Russian assault on Ukraine that had entered its seventh day at the midweek milestone.

“Though added disruptions to global supply chains would eventually filter into Canadian trade flows, and higher commodity prices could boost costs for energy and food products, Canada's direct trade exposure to Russia and Ukraine is small. The domestic economy is also too strong-and inflation pressures too firm-to justify the current emergency levels of interest rates,” says Alvin Tan, head of Asia FX strategy at RBC Capital Markets.

Many Canadian Dollar assets have avoided the crushing declines seen across European financial markets, which had already helped to place GBP/CAD among the bigger fallers in the Sterling exchange rate complex.

But losses could extend further on Wednesday if a widely anticipated interest rate rise from the BoC is accompanied by other action such as an early resort to the process known as quantitative tightening (QT).

“We look for the BoC to hike rates by 25bps in March. We also expect the Bank will remain in its reinvestment phase for the balance sheet, and that it will signal more rate hikes to come,” says Mark McCormick, global head of FX strategy at TD Securities.

Above: Pound to Canadian Dollar rate shown at daily intervals with selected moving-averages.

Reference rates at publication:

GBP to CAD spot: 1.6907High street bank rates (indicative): 1.6315 - 1.6434Payment specialist rates (indicative: 1.6755 - 1.6822Find out about specialist rates and service, hereSet up an exchange rate alert, hereThe BoC said in its January policy decision that its benchmark cash rate will need to rise some distance from its current 0.25% level during the months ahead and over the balance of the year if the recent rapid acceleration of inflation is to be stopped in its tracks.

Governor Tiff Macklem said in the subsequent press conference and later reiterated in parliamentary testimony that “a series” of increases would be necessary to return inflation to the two percent target before the end of the BoC’s forecast period.

This - and a further incremental surge in oil prices - are a big part of why many strategists around the market have been keen buyers of the Canadian Dollar during recent weeks; and especially against currencies like Sterling.

“The GBPCAD trade hit the take profit. That was a good trade,” says Brent Donnelly, president at Spectra Markets and a veteran currency trader.

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“I expect the Bank of Canada to deliver a hawkish 25 bp hike on Wednesday, much as the RBNZ did. Short USDCAD looks good to me, but I don’t feel compelled to add risk today as it’s hard enough to stay bullish on the world with all the scary stuff going on,” Donnelly also said on Tuesday.

Donnelly and Spectra Markets were sellers of GBP/CAD from 1.7252 last Wednesday and booked profits on the trade around 1.7010 last Friday, although others remain bearish in their outlook and have suggested further losses are likely on Wednesday.

“With the Fed and BoC set to hike, we don't see a huge swing factor for USDCAD. We like long CAD exposure to European crosses, where carry, rate hikes, and terms of trade remain attractive, and maintain short GBPCAD exposure,” TD Securities’ McCormick said on Tuesday.

McCormick and the TD Securities team also sold GBP/CAD last Wednesday, around 1.7243, but are looking for a more protracted decline down to 1.6580, which is close to Sterling’s March 2020 coronavirus-inspired low.

Above: USD/CAD shown at daily intervals with Fibonacci retracements of 2022 rally indicating likely areas of technical support for U.S. Dollar and resistance for the Canadian Dollar.

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“The rising geopolitical risk also favors terms of trade for commodity exporters versus importers. That's another theme that has worked quite well in FX and one that favors GBPCAD lower,” McCormick noted last week.

Sterling’s declines have been heaviest since Russia’s military embarked upon an attempted conquest of Ukraine, which has weighed heavily on central and eastern European currencies; especially the Polish Zloty.

This has appeared to be pulling the Euro lower, with this in turn weighing heavily upon the Pound.

However, the Pound to Canadian Dollar rate would also be vulnerable this Wednesday if the BoC’s policy decision puts pressure on the influential USD/CAD rate.

GBP/CAD tends to closely reflect the relative performance of GBP/USD and USD/CAD, and could potentially slide further with USD/CAD even if at the same time GBP/USD manages to hold onto the 1.33 handle.

Above: GBP/USD shown at daily intervals alongside USD/CAD.