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A recent recovery peters out and leaves Sterling poised for a resumption of weakness.
The pound to Canadian dollar exchange rate (GBP/CAD) risks further losses in the coming week after a short-lived rebound peters out.
The pair recovered from 1.8350 to 1.8490 during the course of the previous week but has since turned lower, aided in no small part by Friday's impressive Canadian labour market report.
Canada's economy added 66.6K jobs in October, up from 60.4K in September, and ahead of estimates for a -2.5K figure. The data prompted markets to eliminate residual expectations for an imminent rate cut at the Bank of Canada, which helped Canadian bond yields higher, as well as the currency.
"Rate differentials have narrowed in the currency’s favour on a hawkish shift in expectations for the Bank of Canada's policy path, and oversold technical positioning suggests that the loonie could grind higher in the near term - but the operative word is 'grind', given that any moves are likely to lack conviction," says Schamotta.
Fair winds behind the Loonie blew stronger on Monday, with news the U.S. government shutdown is finally nearing completion as Democrats and Republicans made progress towards resolving the government funding impasse at the weekend.
"Measures of risk appetite are improving and investors are moving out of safe havens like the Japanese yen and Swiss franc into economically-sensitive units like the Aussie, Canadian dollar, and Mexican peso," says Karl Schamotta, Chief Market Strategist at Corpay.
Eight Democratic lawmakers broke with peers in the U.S. Senate to vote through a compromise plan that would put in motion an agreement that would reopen the U.S. government and keep it funded until the end of January.
This raises the odds of the record-breaking shutdown ending as soon as this week.
"The Canadian dollar is pushing higher as we go to print, partly propelled by Friday's better-than-forecast jobs data, but mostly by a broader improvement in global risk appetite," says Schamotta.
In response, the pound to Canadian dollar exchange rate (GBP/CAD) eases to 1.8461 on Monday, ensuring a recent recovery is capped just below the 21-day exponential moving average (EMA).
We can view last week's recovery through the prism of an exchange rate's natural tendency to mean-revert after big moves: we saw a sharp fall in GBP/CAD during the second half of October, and the subsequent bounce looks to be the market adjusting for oversold conditions.
Because the pair is still covered by the 21-day EMA, we accept the short-term downtrend is still in place, and this adjusts our sights on the Oct. 29 low at 1.8325 ahead of firmer support at 1.8296-1.8230.