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GBP extends gains against CAD, AUD and NZD amid gloomy mood

High-beta currencies have nursed losses against risk-off counterparts on Friday, with some set for their worst week since the pandemic shook foreign exchange (FX) markets back in March.

Losses in risk-on currencies such as the Australian dollar (AUD), Canadian dollar (CAD) and New Zealand dollar (NZD) have been triggered by the alarming surge in global COVID-19 cases, as well as uncertainty ahead of Tuesday’s US presidential elections.

Although Australia and New Zealand have seen few coronavirus cases in recent weeks, the unrelenting wave of new daily COVID-19 infections in the US and Europe has darkened the outlook for global economic recovery and ate away at risk appetite.

Canada has also fared better than other countries over its tackling of coronavirus, which has supported the Canadian dollar (CAD) in currency markets. However, the “Loonie” is now set for its worst week since April as national COVID-19 lockdowns are reimposed in the EU have renewed fears over a collapse in oil demand.

While pound Sterling (GBP) has been a victim of US dollar (USD) strength this week, the UK currency rebounded against the greenback on Friday after EU Commission President confirmed a newswire report on significant progress in UK-EU trade talks.

Brexit trade talks resumed in Brussels from Thursday, and it is believed that UK Prime Minister Boris Johnson and President Von der Leyen will sign an accord by November 3rd. 

As Brexit negotiations continue to be the primary driver of pound Sterling (GBP) exchange rates, GBP has gained traction in currency markets and is higher against most major currencies including the Canadian dollar (CAD) and Australian dollar (AUD).

However, speculation over a national COVID-19 lockdown being reimposed in the UK and uncertainty surrounding the looming US presidential elections could trigger downside in GBP.

That being said, the British pound (GBP) will likely remain elevated against riskier assets which stand to slump more in times of heightened uncertainty.

GBP/AUD climbs in safe-haven environment

The British pound (GBP) has advanced against a host of major currencies on Friday amid fresh optimism towards the status of Brexit trade talks.

However, the British pound to Australian dollar (GBP/AUD) exchange rate is also benefiting from the risk-averse mood in currency markets.

At the time of writing, GBP/AUD is trading 0.2% higher at AUD 1.8415, and growing concerns over the outlook for the global economy could ensure the currency pair remains elevated.

Expectations for the Reserve Bank of Australia (RBA) to lower interest rates and increase easing at Tuesday’s policy meeting has contributed to AUD weakness this week and volatility could rise further for the currency over the weekend.

RBA Governor Philip Lowe paved the way for further easing earlier this month after stressing about the need to suppress the Australian dollar’s (AUD) strength.

The coronavirus lockdown in Victoria has also dragged on economic recovery in the country. Now, with COVID-19 spiralling on both sides of the Atlantic, prospects of the central bank performing a rate cut at its November meeting have increased.

Even if the RBA surprises FX markets and leaves monetary policy unchanged, the Australian dollar (AUD) will be caught in the US presidential election saga in the following session. 

A Joe Biden victory should offer the “Aussie” dollar significant support; however, a contested result or Trump win will almost certainly add to the gloomy mood and buoy safe-haven assets.

New Zealand dollar resilience fades ahead of US election

After staging a rebound during the Asian session, the New Zealand dollar’s (NZD) momentum is all but bullish heading into New York trading hours.

Data signalling an increase in employment levels and an improvement in business confidence seen in ANZ’s Business outlook triggered upside in the New Zealand dollar (NZD).

However, the “Kiwi” currency has retreated ahead of the weekend, with investors realising that raging COVID-19 cases will likely result in a more dovish response from the Reserve Bank of New Zealand (RBNZ).

Against the British pound (GBP), the New Zealand dollar (NZD) has slumped by 0.3% to GBP 0.511, while the New Zealand dollar to US dollar (NZD/USD) exchange rate is 0.2% lower at USD 0.6619.

However, recent data has shown activity at workplaces, grocery and retail stores have recovered to January 2020 averages, which may explain why NZD has been able to contend with the US dollar (USD) this week. 

Should the New Zealand government continue to tackle coronavirus successfully, NZD could outperform in FX markets. As could the Canadian dollar (CAD) as Canada, compared to other countries, has also better-managed COVID-19.

Canadian dollar tipped to outperform

With surging COVID-19 cases, the Bank of Canada’s (BoC) decision to expand its quantitative easing programme and US dollar (USD) strength has weighed heavily on the Canadian dollar (CAD) this week.

Presently, the British pound to Canadian dollar (GBP/CAD) exchange rate is 0.2% higher at CAD 1.7249, while the US dollar to Canadian dollar (USD/CAD) exchange rate is flat.

However, according to Juan Prada, FX strategist at Barclays, “these losses could be short-lived as Canada’s low fatality, and test-positivity rates suggest the country has a better management of the health crisis relative to its G10 peers.”

Gross domestic product (GDP) data released on Friday also revealed that the Canadian economy grew further in August with real GDP rising 1.2%, while Q3 estimates point to a 10% increase in economic growth.

Although raging coronavirus infections and more stringent restrictions could cap upside in the Canadian dollar (CAD), stimulating fiscal stimulus packages offered by the government could limit downside headwinds.

The Canadian dollar (CAD) could also outperform the British pound (GBP) and the US dollar (USD) if investors price in “Blue Wave” odds ahead of the US presidential election.

While there are just days to go until the result, Barclays believes the Canadian dollar (CAD) would be one of the primary beneficiaries of a Democratic sweep due to the currencies correlation to the US dollar (USD) and equity markets.

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