- GBP/CAD could rally in the event of a Brexit deal

- But forecast to slip in 2021, regardless

- CAD outperformance tipped to extend by RBC Capital Markets

Image © Bank of Canada

GBP/CAD spot rate at publication: 1.7258Bank transfer rate (indicative guide): 1.6654-1.6775FX specialist providers (indicative guide): 1.6872-1.7137More information on FX specialist rates hereThe Canadian Dollar will outperform the British Pound through the course of 2021, with the Pound-to-Canadian Dollar exchange rate (GBP/CAD) forecast to go as low as 1.58 by analysts at Royal Bank of Canada.

The Montreal headquarter lender says the risks to Sterling are asymmetrically positioned to the downside, particularly beyond the immediate knee-jerk reaction to the outcome of trade talks.

On the matter of what Sterling will do in the event of a deal or no deal outcome to talks, RBC Capital Markets say Sterling could see 2-3% immediate upside if the two sides agree the details of a narrow FTA before the end of the year.

In the event of no deal becoming inevitable, the downside may be slightly larger (around 4-5%), given the skew in market expectations.

But, crucially, from either of those starting points, "the risk is a steady decline in early-2021," says Adam Cole, Head of FX Strategy at RBC Capital Markets.

Above: GBP/CAD in 2020

The Pound has maintained a relatively stable - albeit wide - range for much of 2020, with ~1.68 seen at the bottom and ~1.76 seen at the top. The rate has rallied by 2.20% this week alone to 1.7260 amidst rising hopes that the UK and EU are set to reach an agreement in coming days.

In the near-term RBC Capital markets see the prospect for significant interruptions to UK trade as physical borer checks are instituted, with it remaining unclear with the systems are yet in place to handle the new regime.

Furthermore, sectors outside the scope of a free trade agreement between the EU and UK - such as finance - face notable uncertainty going forward.

The UK's response to the covid-19 crisis leaves it with a notable fiscal hole that must be plugged, which will increase focus on the country's twin fiscal and current account deficits.

Cole says the deterioration in the budget position is more likely to flow through to the current account, which is already in deficit by 4% of GDP.

"Our longer-term expectations for GBP have to include the risk that attracting the foreign inflows the UK will need “requires” a relative cheapening of UK assets via the currency. We therefore expect grinding GBP underperformance to continue into the medium-term," says Cole.

Meanwhile, the Canadian Dollar is being tipped by RBC Capital Markets to remain an outperformer.

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"New fiscal stimulus in the Fall Economic Statement should also be a positive, with the extension of some support benefits to mid-2021 helping to offset the impact of recent COVID restrictions," says analyst George Davis.

The Canadian Dollar maintains a correlation with broader investor sentiment and global growth trends, tending to appreciate when these factors are in the ascendency.

With vaccines now being made available economists say 2021 will likely see the global economy recovery and 'risk on' assets such as stocks and commodity prices recover, all of which are CAD-supportive.

"The global growth outlook also improve, an incremental boost to commodity prices would be beneficial as progress in the Trans Mountain Pipeline Expansion reduces oil market egress headwinds," says Davis.

RBC Capital forecast the Pound-to-Canadian Dollar at 1.62 by the end of March 2021, 1.58 by the end of June 2021, 1.56 by the end of September 2021 and 1.54 at end-2021.

The current spot price of GBP/CAD is at 1.7250.