The GBP CAD exchange rate is liable to become increasingly volatile in the medium-term as markets digest the Office for Budget Responsibility’s (OBR) downgrading of the UK’s growth forecast and as NAFTA negotiations progress into the New Year.
NAFTA Break-Up Risk Limits the Canadian Dollar (CAD) Exchange Rate
The outlook for the Canadian Dollar has grown increasingly gloomy today with markets concerned that the North American Free Trade Agreement (NAFTA) might fall apart following negotiations in the New Year.
Whilst some economists have argued that the long-term economic damage involved in a break-up of NAFTA would be limited for Canada, others have asserted that the resulting uncertainty over monetary policy and future trade agreements could hit the ‘Loonie’ in the short term.
Markets are also concerned that a new deal could eventually result in big concessions from Canada, including one which would see carmakers pushed to produce more of their products within the US.
In other news, crude oil prices eased on Thursday as markets responded to rising output from US producers, supply that could potentially hamper OPEC’s attempts to quell the global glut.
US output C-OUT-T-EIA has risen some 15% since mid-2016, putting the United States on track from being the world’s biggest importer of oil to one of the world’s major exporters.
Matt Stanley, Fuel Broker at Freight Investor Services in Dubai shared his thoughts:
‘The US will, without question of doubt, be the biggest oil producer in the world in the next five years. They are producing… at half the cost than they were just two years ago’.
In this respect, whatever OPEC agrees upon will likely be rendered obsolete by the actions of US suppliers, potentially leaving the Canadian Dollar floundering as a result.
Downgraded UK Growth Forecasts Limit the Near-term Outlook for the Pound (GBP)
The Pound may encounter turbulence in the months ahead if yesterday’s OBR’s growth forecast proves accurate.
On Wednesday the OBR revealed that they now expect the UK’s economy to grow by only 1.5% this year, down from the estimate of 2% made in March.
The group also claimed that growth will continue to drop until it reaches 1.3% in 2020, before finally rising once again in 2021.
This has been attributed for the most part to weak productivity and the idea that it is here to linger on from the financial crisis until 2021.
As a result, market demand for the Pound will likely continue to remain volatile,
Brexit Volatility and the GBP CAD Exchange Rate Outlook
Another significant contributor to the GBP CAD exchange rate outlook will be progressions (or lack thereof) in the Brexit negotiation process.
Market demand has historically fluctuated on each announcement relating to Brexit, with the latest budgetary declaration being no different.
UK Chancellor Philip Hammond asserted that the UK will be setting aside an extra £3bn for Brexit preparations, stating:
‘We are determined to ensure that the country is prepared for every possible outcome. We have already invested almost £700m in Brexit preparations. Today I am setting aside over the next two years another £3bn. And I stand ready to allocate further sums if and when needed,’ he said.
This news was quite well received, increasing investor optimism that the UK will be capable of effectively handling the transition.
Nonetheless, markets remain concerned that the biggest sticking point; the Brexit divorce bill, will continue to prevent progressions onto trade talks and other aspects of the changeover, potentially pushing the UK towards a ‘no-deal’ scenario and businesses towards a ‘cliff-edge’ Brexit.
Markets are not overly keen on this scenario, as it would theoretically involve a great deal of uncertainty, but if no progress is made the outlook will increasingly shift towards this direction and leave GBP CAD tumbling.
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