-GBP/CAD vulnerable as virus threat grows, Brexit risk lingers.

-Domestic risks loom large over GBP as CAD looks to recover.

-Oil prices and previous weakness may see CAD outperform.

A single oil pump jack in the farm field. Calgary, Alberta, Canada. Image © Adobe Stock

GBP/CAD spot rate at time of writing: 1.7057Bank transfer rate (indicative guide): 1.6499-1.6618FX specialist providers (indicative guide): 1.6841-1.6943More information on FX specialist rates hereThe Pound-to-Canadian Dollar rate recovered nearly half its earlier Brexit-inspired losses last week but Sterling could risk a reversal over the coming days if the government continues to threaten a new ‘lockdown’ and progress toward a Brexit trade agreement remains lacking.

Sterling recovered losses after European officials opted to remain at the negotiating table despite Prime Minister Boris Johnson’s compromise with Brexit rebels in the UK parliament leaving the offending clauses embedded within the controversial Internal Market Bill.

The Pound-to-Canadian Dollar rate rose more than one percent in a week marred by underperformance for the Loonie, which ceded ground to all major currencies other than the Swiss Franc and oil-linked Norwegian Krone, although some analysts anticipate a Canadian recovery this week while Sterling has new threats to contend with.

Prime Minister Boris Johnson has threatened another national ‘lockdown’ and already clobbered vast swathes of Northern England with tightened restrictions due to a second wave of coronavirus infections that’s eclipsed the ongoing EU trade talks as far as the domestic news agenda is concerned.

Friday’s restrictions halted Sterling’s recovery but GBP/USD, the main Sterling exchange rate, was already running out of road and could now be vulnerable to a dip back to 1.27 this week. That would be bearish for the Pound-to-Canadian Dollar rate, which is sensitive to GBP/USD, especially in light of the anticipated performance of the Loonie.

“OPEC+ making further steps in the direction of cuts compliance should keep USD/CAD gains relatively short-lived. Additionally, recent CFTC positioning data continue to highlight that CAD is the most oversold currency in G10, which points to a somewhat lower vulnerability compared to other activity currencies to swings in sentiment. Next week’s empty data calendar in Canada should allow CAD to trade strictly in line with risk sentiment and oil, and we may see USD/CAD comfortably trade in the 1.31/1.32 area, waiting for another catalyst,” says Francesco Pesole, a strategist at ING. “The prime driver of sterling remains the outlook for the UK-EU trade negotiations.”

Above: Pound-to-Canadian Dollar rate shown at daily intervals.

Oil prices have risen close to 10% in the last week and could have scope to retain these gains in light of efforts by the Organization of Petroleum Exporting Countries (OPEC) to boost compliance with agreed production cuts that were intended to lift prices. Canada’s Dollar showed little interest in following oil prices higher last week but some local analysts have observed signs that the correlation with prices of Canada’s largest export are picking back up, which could mean see oil prices supporting the Loonie this week.

If a Canadian recovery takes place at the same time as Sterling is found in retreat then the the Pound-to-Canadian Dollar rate would suffer. GBP/CAD would likely be found trading at 1.6765 if GBP/USD fell back to 1.27 as USD/CAD navigated at the top end of the 1.31-to-1.32 range envisaged by ING’s Pesole. The Pound would fall further to 1.6638 if Loonie strength pushes USD/CAD to 1.31 and the bottom of ING’s anticipated range.

The Pound will struggle to get above 1.7162 this week if ING is right in its USD/CAD outlook and others are correct about GBP/USD.

"We have made modest gains on the trades we added two weeks ago - long CAD vs EUR and GBP, the latter in particular benefitting from an overdue realization that Brexit remains an unresolved threat to the economy, UK rates and the currency. We are doubling up on our short GBP and EUR exposure this week," says Paul Meggyesi, head of FX research at J.P. Morgan. "The bear case for GBP is partly political - Brexit talks have not broken down but neither have they made discernible progress - and partly macro as the economy faces risks from the winding down of the furlough scheme next month as well as a sharp rise in COVID-19 cases that is now leading to localised lockdowns for about one-sixth of the population.”

J.P. Morgan is a seller of the Pound-to-Canadian Dollar rate since early September and is looking for it to fall as investors fret about the prospect of a ‘no deal’ Brexit and as the UK’s economic vulnerabilities weigh on Sterling. The bank added to its bet against Sterling last week by selling the Pound-to-Yen rate after the Bank of England (BoE) said it’s preparing to implement a negative interest rate policy that would make the Pound even less attractive to investors.

Above: PCAD/USD rate shown at daily intervals alongside WTI crude oil futures (orange line, left axis).

Meanwhile, the Canadian Dollar has exposure to a recovering U.S. and global economy as well as oil prices that are a further direct beneficiary of that recovery. In addition, it’s underperformed many rivals including the Brexit and coronavirus-blighted Pound in recent months so could be due a period of catch-up. However, whether that materialises will depend as much on events on the ground in Canada as it does developments in the oil market and economies overseas or across land borders.

“A week with no major economic reports will divert eyes to another set of data, the daily Covid-19 case counts in the country’s four largest provinces. We’ve seen mini-steps to retighten social distancing rules, but thus far, business sectors that were allowed to open in Stage 3, including indoor restaurants, bars and gyms, remain open. It will take a couple of weeks to see if the measures taken thus far are impacting case counts,” says Avery Shenfeld, chief economist at CIBC Capital Markets.

There are no major economic announcements due out of either Canada or the UK this week, which should leave the Pound and Loonie taking cues from coronavirus developments, investor sentiment as reflected by the trajectory of stock markets, speeches from BoE Governor Andrew Bailey and a government economic update delivered by Canadian Governor General Julie Payette. Bailey’s first speech is at 08:30 on Tuesday and the second at 15:00 Thursday while Payette will speak Wednesday around 09:45 local time.

“Markets will be listening for clues on what’s next for fiscal policy at the federal level, and from what we’re hearing, this won’t be as sweeping a vision, or as big in terms of dollar commitments, as some in the media have suggested. For one, dollars and cents are typically matters for budgets, not throne speeches,” Shenfeld says. “Second, the timing is all wrong for Ottawa to lay out a green-focused, expensive, grand plan for “building back better.” Those may be laudable goals, but they require extensive federal-provincial cooperation and considerable policy innovation to achieve, and governments across the country have other preoccupations these days.”

Above: Pound-to-Canadian Dollar rate shown at weekly intervals.