By Gary Howes

The Canadian Dollar (CAD) has continued its decline against the British pound (GBP) on Friday. A relief rally vs the US dollar has meanwhile shown signs of weakening.

"The drop was lead by a sharp decline in aerospace related production north of the border. The news prompted the Canadian dollar, which touched on a three-week high against the greenback in a strong short-covering rally recently, to give up some of its overnight gains," notes Omer Esiner at Commonwealth Foreign Exchange.

A look at the Canadian dollar exchange rate complex shows:

The pound sterling to Canadian dollar exchange rate is 0.32 pct lower on a day-to-day basis at 1.8352.The euro to Canadian dollar exchange rate is 0.07 pct higher at 1.5031.The US dollar to Canadian dollar exchange rate is 0.02 pct higher at 1.0980.Note: All CAD quotes here refer to the wholesale spot market. Your bank will charge a spread at their discretion when passing on a retail rate. However, an independent FX provider is so well placed on the market that they are able to deliver you up to 5% more currency. Please learn more here.

Outlook favours the Canadian dollar thanks to interest rate differentials

Well, on the basis of interest rates it is worth noting that events are actually swinging in the USD's favour,

Indeed, Stephen Gallo at BMO Capital notes that the move lower in USD/CAD could in fact be explained as a short-squeeze:

"We characterise this week’s move in USDCAD to 1.0950 as short-squeeze strength. Underneath that FX move, the interest rate differential has actually moved in the USD’s favour. The interest rate differential has been the biggest driver of USDCAD over the past six months."

Analyst Shaun Osborne at TD Securities says he believes USD/CAD is well priced at current levels with the current correction running out of steam; "we think that further, modest losses towards the 1.09 area will make USDCAD an attractive buy."

Keep an eye on the inflation print next week says Camilla Sutton at Scotiabank:

"Technicals warn of near‐term CAD strength; however unless CPI comes in above expectations, we continue to expect a temporarily dovish tone from the BoC to drive CAD weakness into mid‐year; followed by a retracement in the second half of 2014."