HSBC Trades GBP/CAD Lower

Image © Pound Sterling Live

HSBC says the pound will trend lower against the Canadian dollar.

In its latest currency strategy update, the British banking giant says it looks for lower GBP/CAD, judging the Canadian economy is well poised, while the UK remains vulnerable to its twin deficits problem.

Although the British pound has shown resilience since the start of the conflict in the Middle East, HSBC believes this is due to what appeared as a hawkish tilt at the Bank of England’s 19 March meeting.

The Bank was all set to lower interest rates in March, an expectation that prompted widespread pound sterling weakness through January and February. But the war scuppered that and UK rate expectations rose sharply, which re-established support for the pound.

“Nonetheless, with the topic of potential de-escalation arriving in FX markets, this rate buffer that GBP has built up may be eroded,” says HSBC, looking forward to a potential end of the conflict in the Middle East.

A perennial headwind facing the pound is its twin budget and current account deficits, which means it relies heavily on foreign investor funding. During times of heightened market nervousness, the desperately needed inflow of foreign funds can dry up, which pressures the pound.

The Canadian dollar has meanwhile been one of the better-performing G10 currencies during the war as rising oil prices have bolstered the country’s export earnings from its extensive oil-producing assets.

“The Canadian economy is well insulated from the conflict in the Middle East and activity has continued to surprise positively in recent months. This resilience is rooted by the CAD’s sensitivity to oil prices, which could see it outperform in a re-escalation scenario,” says HSBC.

“We therefore see GBP-CAD moving lower,” it adds.

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