- Canadian economy assessed to be at limited risk from Brexit uncertainty – ‘Loonie’ held edge over other commodity-correlated currencies
- Suspension of property funds worried investors – Pound weakness intensified as outlook of UK economy muted
- Fed dovishness expected to benefit Canadian Dollar – FOMC minutes could lower odds of 2016 rate hike
- Weaker UK data predicted to soften Sterling further – Disappointing GDP estimate likely to exacerbate market jitters
There has been no real let-up in the downside pressure on the Pound this week, with the GBP CAD exchange rate extending losses even as Brent crude trends lower.
Canadian Dollar (CAD) Demand Improved despite Oil Price Weakness
Markets have remained in a decidedly risk-off mentality so far this week, with uncertainty and anxiety continuing to dominate the outlook. However, the impact on the Canadian Dollar (CAD) has been somewhat more muted than that on its commodity-correlated cousins, in large part thanks to the apparent insulation of the Canadian economy. Although oil prices have come under pressure once more, and the latest Manufacturing PMI slipped back, investors are relatively confident that the impact of Brexit fallout will likely be minimal for Canada. As researchers at TDS noted:
‘For now, we expect the Brexit fallout to stay relatively contained regarding its impact on the global economy. There are certainly risks of escalation, but these are not yet our core scenario. We expect the aftermath of this event to remain a slow-burn story, one that plays out over weeks and months rather than days.’
This more optimistic assessment helped the ‘Loonie’ to maintain a stronger footing against the softened Pound (GBP) during the early week.
Positivity was decidedly lacking for the UK economy, meanwhile, as the June Construction and Services PMIs both proved disappointing. While the domestic construction sector fell back into contraction territory the crucial service industry also showed signs of slowing. This was particularly concerning due to the fact that much of the survey was compiled before the final result of the EU referendum, suggesting that a further slowdown in economic activity is imminent.
UK Economic Worries Intensified to Keep Pound (GBP) on Weaker Footing
The Pound’s bearish trend accelerated in response to the news that three major property funds had opted to suspend redemptions due to heightened investor nerves. This did not encourage particular confidence, particularly as the robustness of the domestic property sector was already in doubt in the wake of the Brexit vote. Markets were particularly spooked by this move as, Lee Hardman of MUFG noted;
‘Stress in commercial property was one of the main areas of concern highlighted by the BOE in their latest Financial Stability Report. Governor Carney added to market concerns by warning that some of the financial stability risks related to Brexit “have begun to crystallise”.’
Brent crude weakened for a third consecutive session of Wednesday, with the commodity slipping further below US$48 per barrel due to rising oversupply concerns. This weakness is also attributable to the bullishness of the US Dollar (USD), which had defied poor domestic data in order to extend its gains against rivals. While the Fed is not expected to raise interest rates any time soon increased safe-haven demand has kept the ‘Greenback’ on stronger form, to the detriment of the ‘Loonie’. However, as markets anticipate a fresh fall in US crude inventories this week the Canadian Dollar maintained an uptrend against many of the majors.
GBP CAD Exchange Rate Forecast: Dovish Fed could Extend Canadian Dollar Gains
If the June Federal Open Market Committee (FOMC) meeting minutes support speculation that the central bank is unlikely to achieve its earlier goal of raising interest rates before the end of 2016 then the ‘Loonie’ could strengthen. US Dollar weakness would benefit oil prices, as well as the appeal of higher-yielding currencies, with a slower pace of Fed tightening also reducing pressure on the Bank of Canada (BOC) to shift away from its current neutral outlook.
Should Thursday’s US stockpiles fail to show a decent drop in crude stocks then the Canadian Dollar is likely to come under renewed pressure. With global production as a whole expected to remain high any decrease in supply would offer some much needed reassurance to the market. A significant inventory fall is expected to see the GBP CAD exchange rate trending lower ahead of the weekend.
While the Pound remains primarily tied to Brexit-based developments sentiment could still be dented by the latest Industrial and Manufacturing Production figures. If the domestic economy demonstrates further signs of weakness then investors are likely to continue selling out of Sterling, especially if the NIESR Gross Domestic Product Estimate for June also disappoints.
Current GBP, CAD Exchange Rates
At the time of writing, the Pound to Canadian Dollar (GBP CAD) exchange rate was slumped around 1.6810, while the Canadian Dollar to Pound (CAD GBP) pairing was making gains in the region of 0.5943.