Morgan Stanley Trade Of The Week: Sell GBP/CAD Targeting 1.9500

Currency investors should consider selling GBP/CAD this week, advises Morgan Stanley in its weekly FX pick to clients.

"We like selling GBPCAD, underlining the tactical nature of this trade. We remain oil-bearish, but cannot ignore market positioning leading to a further oil price squeeze. The direct terms of trade effect of fluctuating oil prices is more significant for CAD compared to GBP. The oil price impact on GBP is of indirect nature, coming via falling dividend payments of its oil sector investment and the investment flows of sovereign wealth funds. Sovereign wealth fund flows into the UK relative to GDP are five times higher than flows into the US. This reduced oilrelated net inflow into the UK is long term, while terms of trade effects work immediately. Hence, the oil short-covering rally should work in better support for CAD compared to GBP.

Fiscal and monetary divergence provides the most important factor for our bearish GBPCAD position. While Canada works on a moderate 0.3% fiscal impulse, the UK’s fiscal tightening announced in summer looks pro-cyclical with hindsight. The BoE seems to have no intention of tightening early, while the BoC has ignored calls to ease policy, keeping rates unchanged when meeting last Wednesday," MS says as a rationale behind this call.

In line with this view, MS likes selling GBP/CAD from 2.0230 with a target of 1.9500 and stop at 2.0520.

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