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Canadian Dollar Rebound Could Contain GBP/CAD as Election Uncertainty Fades

- GBP/CAD little changed on week ahead of election
- As CAD’s recent underperformance appears to fade
- Could limit GBP/CAD upside as election risk passes

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  • GBP/CAD reference rates at publication:
  • Spot: 1.7450
  • Bank transfer rates (indicative guide): 1.6836-1.6958
  • Money transfer specialist rates (indicative): 1.7290-1.7360
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The Canadian Dollar was on course to end the week Friday with gains over a large majority of its nearest rivals including Sterling and may be set to remain a weight on GBP/CAD if the Loonie’s month-long run of underperformance fades with the uncertainty surrounding Monday's election.

Canada’s Dollar was higher for the week against all in the G10 contingent of major currencies except the Japanese Yen and Norwegian Krone on Friday.

However, gains over Sterling, the Swedish Krona and the U.S. Dollar were marginal and for the month dating back to the middle of August, the Canadian Dollar had actually ceded ground to all in the above grouping except for the greenback, Japanese Yen and Swiss Franc.

The Pound-to-Canadian Dollar rate was up close to a full percent for the month to Friday and although August’s second quarter GDP report likely dampened appetite for the Loonie along the way, some analysts see uncertainty connected to Monday’s election in the mix too.

To the extent that they’re right it may mean the Pound-to-Canadian Dollar rate would have to work harder in order to advance any further once uncertainty fades following the ballot on Monday, and could even indicate that a setback is possible for the weeks ahead.

“CAD has actually lost 1.1% relative to MXN since the S&P 500 printed its last cycle high on September 2. To us, this is a fairly shocking result,” says Greg Anderson, global head of FX strategy at BMO Capital Markets, in a Thursday note.

CAD rate comparison

Above: Pound-to-Canadian Dollar rate shown at 4-hour intervals alongside MXN/CAD and USD/CAD.

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Canada’s Dollar has underperformed even as the intervening period proved generally favourable for riskier currencies, and despite oil prices posting high single digit gains, although for BMO one of the most notable features of the Loonie’s performance in this period is its loss against the Mexican Peso.

While oil prices and risky currencies have generally risen over the last month, many stock markets have actually fallen, which is something that would typically engineer weakness in both currencies albeit more so with the Mexican Peso.

“We would expect to see a wave of CADMXN strength over that same interval. But that is not what has occurred,” Anderson writes. “We don't think that the oil price rally is the reason for MXN outperformance. Another factor, clearly, is the Canadian election and associated uncertainty.”

For BMO the clearest tell-tale signs of an election impact on the Loonie are the one-month gain in MXN/CAD and the decline in CAD/MXN, although the potential rub for Sterling is that it’s not far behind the Mexican currency in performance against the Canadian Dollar.

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That other risky currencies’ have advanced on the Loonie could be an indication that some of GBP/CAD’s gains also resulted from a ‘risk premium’ reflecting uncertainty over the outcome of Monday’s vote, meaning that Sterling may be vulnerable to something of a setback in the coming week.

“Short, medium and longer run DMI oscillators are aligned bullishly for the GBP which should mean limited losses and better GBP support on minor dips,” says Juan Manuel Herrera, a strategist at Scotiabank.

“We look for GBPCAD support towards the low/mid 1.74s from here and for the GBP to potentially retest key resistance at 1.7575/1.7625 over the next couple of weeks,” Herrera writes in a Monday note.

Although the right degree of appreciation and most appropriate overall level for any exchange rate would always be a matter for debate among analysts, some form of Pound-to-Canadian Dollar rate advance for the recent month is not without merit.

GBPCAD daily

Above: Pound-to-Canadian Dollar rate shown at daily intervals alongside USD/CAD.

This is especially so because twice in that period the Bank of England (BoE) has confirmed that it could be likely to raise interest rates as soon as next year, and since then UK employment figures for July and inflation data for August have both offered further justification for it having done so.

But whether this is enough to keep GBP/CAD’s upward trajectory intact as the uncertainty discount fades from Canadian exchange rates over the coming weeks remains to be seen, and it could be likely at the least that further upside becomes more difficult for Sterling to come by.

“We don't think there are any significant structural CAD implications of this election, indicating that the outcome probably won't have a long-lasting market impact,” says Mazen Issa, a senior FX strategist at TD Securities.

“In short, we believe the election results, especially if messy out of the gates, could bias USDCAD towards the recent highs around 1.28. At the same time, we would look to fade those rallies, targeting a move back towards the mid-1.24 level through the fall,” Issa writes in a Thursday research note.

The response by the main Canadian exchange rate USD/CAD to Monday’s results will be instrumental in determining at least the short-term outlook for GBP/CAD, which always closely reflects an amalgamation of USD/CAD and GBP/USD’s performances.

Any sharp rise in USD/CAD next week would be supportive of GBP/CAD, while losses for the former would typically act as a headwind for Sterling, although Scotiabank's Herrera says the recent "bullish tone should persist while the GBP holds above 1.7350."

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