Pound-to-Canadian Dollar Rally May Be Near Its End

The British pound has seen significant gains against the Canadian dollar in September, but Scotiabank's FX strategy team believes this rally may be coming to an end. The pound-to-Canadian dollar exchange rate reached a high of 1.8819 on Wednesday, nearing resistance levels that have capped every previous rally since early July.

Scotiabank groups the Canadian dollar with the yen and the pound as G10 currencies showing 'lesser losses' in a risk-averse market, while the Norwegian krone, Australian and New Zealand dollars, and Swedish krona underperform. Eric Theoret, FX Strategist at Scotiabank, notes that the Canadian dollar has shown impressive resilience since late June, despite intensified trade policy uncertainty and a significant deterioration in the US-Canada relationship.

The Bank of Canada is expected to begin a hiking cycle by late this year, extending into next, with 75 basis points of tightening in total. Scotiabank's medium-term case for the Canadian dollar rests on this expectation. The recent widening in US-Canada spreads has been driven by the US side, but has faded over the past 24 hours after New York Fed President John Williams said there is 'no need for urgency' for another hike.

Scotiabank's fair value estimate for USD/CAD stands at 1.4099, against a spot rate near 1.42, leaving the Canadian dollar cheap relative to rate spreads. The bank targets USD/CAD at 1.37 by year-end and 1.33 by the end of 2027, which points to a pound-to-Canadian dollar rate near 1.8769 at year-end and near 1.8487 by the end of 2027.