GBP/CAD plumbing lowest since September 2019Could remain suppressed near 1.6200 short-termAs global economic risk rises on China ‘lockdown’ BoC outlook aids CAD ahead of latest GDP data

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The Pound to Canadian Dollar exchange rate slipped to its lowest level since September 2019 early in the new week and could struggle to avert further losses in the days ahead if the Loonie continues a nascent run of outperformance.

Canada’s Dollar was one of three top performing major currencies during the five days to Monday and had notched up more than a one percent gain over Sterling after pushing GBP/CAD close to a three year low following the open of the new week.

GBP/CAD traded down to 1.6208 on Monday as Sterling came under pressure alongside stock markets and commodity-linked currencies, which all sustained heavy losses with the exception of the Canadian Dollar.

“We would assign most of the change in market tone to the latest developments in China. A surge in the pandemic seems to be threatening to derail the quarter for China's economy,” says Stephen Gallo, European head of FX strategy at BMO Capital Markets.

“China initially responded to the pressure by letting USDRMB move from the mid 6.30s to levels beyond 6.60 without interference. We have begun to see interference over the past hour, and there may yet be more in days to come'' Gallo and colleagues said on Monday.

Above: Pound to Canadian Dollar rate shown at daily intervals alongside GBP/USD and spread - or gap - between 02-year UK and Canadian government bond yields. Click image for closer inspection.

International markets were mulling on Monday what a growing coronavirus problem in China could mean for the world’s second largest economy amid speculation suggesting that Beijing could be headed for the same kind of ‘lockdown’ that recently shuttered China’s largest city economy, Shanghai.

“The biggest loser is AUD with a -0.8% daily return, with GBP close behind it at -0.7%. Both currencies have a tendency to be highly correlated with the Chinese renminbi, with CNH down another 0.7% today (1.3% at its worst),” Gallo said.

Meanwhile, the Canadian Dollar has been far more resilient than Sterling, the Aussie and other major currencies in what may be a symptom or side effect of an increasingly favourable outlook for Bank of Canada (BoC) monetary policy.

“We’re prepared to be as forceful as needed and I’m really going to let those words speak for themselves,” Governor Tiff Macklem was quoted telling reporters, in reference to the BoC’s interest rate, from the sidelines of the International Monetary Fund (IMF) event in Washington last Thursday.

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The above remarks came barely a day after Statistics Canada data showed Canadian inflation reaching a new milestone high of 6.7% in March, up from 5.7% previously, while the average of the BoC’s three core measures on inflation rose from 3.6% to 3.8%.

“The odds of a 75bps hike at one of the June or July meetings (or even both in an extreme case) have certainly risen, but the CAD still suffered at the hand of a very strong push in favour of the USD this week amid surging Fed hike bets,” says Shaun Osborne, chief FX strategist at Scotiabank.

Since last Wednesday pricing in the overnight-indexed-swap market has shifted to imply that a second 50 basis point increase in the BoC cash rate is almost a certainty for June, which would take the benchmark up to 1.5% and almost fully reverse the BoC’s pandemic-inspired rate cut from 1.75%.

This may be a part of why the Canadian Dollar was more resilient than fallen Sterling to the continuing advance of the U.S. Dollar during the week to Monday with an outperformance that contributed to the Pound to Canadian Dollar rate’s slide to 1.62 by Monday.

Above: USD/CAD shown at daily intervals with Fibonacci retracements of March downtrend indicating likely areas of short-term technical resistance to any U.S. Dollar recovery. Click image for closer inspection.

“USDCAD has surprisingly reversed aggressively back higher,” says David Sneddon, head of technical analysis trading strategy at Credit Suisse.

“The next important resistance is seen at the 1.2844/72 downtrend from the 2021 high and 78.6% retracement, where we would expect to see a cap,” Sneddon said in a Monday review of the Canadian Dollar’s charts.

USD/CAD rose by only around half as much as Sterling had fallen against the greenback by Monday, explaining around half of the decline in GBP/CAD, which always tends to closely reflect the relative performance of Sterling and the Loonie when each is measured against the U.S. Dollar.

Canadian Dollar resilience is a headwind that leaves GBP/CAD at risk of further losses over the coming days and during a period in which the domestic calendar is devoid of major appointments for the Loonie until Friday's GDP data for February.

“February GDP looks to have been rock solid, part of a Q1 pace that has generally surprised to the upside relative to what was expected when the year began,” says Avery Shenfeld, chief economist at CIBC Capital Markets.