- Risk aversion and domestic concerns dent CAD
- Pound retreats after disappointing UK manufacturing production data
- Oil prices under pressure again as Saudi Arabia plans output boost
- No change forecast for BoE policy decision
Worries over Alberta Wildfires Weighed on Canadian Dollar (CAD)
Mixed Canadian employment data continued to weigh on the ‘Loonie’ (CAD) at the start of the week, with a decline of -2,100 in new employment denting confidence in the outlook of the domestic economy. The appeal of the risk-sensitive currency was not enhanced by the news that Chinese imports had fallen sharply by -5.7% in April, leading to fresh worries over the persistent global oil supply glut. While the Alberta wildfire helped to support the price of Brent crude the impact of the blaze is likely to weigh heavily on the outlook of the Canadian economy for some months to come. Downside pressure mounted on the Canadian Dollar, as analysts at Scotiabank noted, with markets increasingly focused on:
‘[…] deterioration in expectations for BoC policy following last week’s weaker trade data and ongoing concerns surrounding the impact of Alberta’s wildfires.’
The Pound (GBP), meanwhile, saw a dip in demand on Monday thanks to an unimpressive Halifax House Price report. Indicating that the domestic housing market was showing signs of slowing in April, this reignited concerns over the negative impact of ‘Brexit’ uncertainty on the UK economy. Nevertheless, the relative weakness of the commodity-correlated ‘Loonie’ prompted the Pound Sterling to Canadian Dollar (GBP/CAD) exchange rate to soon resume an uptrend.
Tuesday’s raft of UK trade data provided a stronger boost for Sterling, with the country’s visible trade deficit unexpectedly narrowing from -£11.4 billion to -£11.2 billion in March. This suggested that referendum uncertainty had been a more minimal drag on trade and the domestic economy than investors had previously estimated. Consequently, the GBP/CAD pairing climbed to a six-week high of 1.8737.
Unimpressive UK Manufacturing Data Prompts Pound Sterling to Canadian Dollar (GBP/CAD) Exchange Rate Downtrend
Confidence diminished sharply on Wednesday morning, however, with the publication of the latest UK Industrial and Manufacturing Production figures. While industrial output proved stronger-than-expected on the year in March, printing at -0.2% rather than -0.4%, this was overshadowed by a more disappointing performance from the manufacturing sector. Manufacturing production suffered its largest drop since May 2013, sliding -1.9% – in line with forecasts.
As a result the GBP/CAD exchange rate reversed course, trending lower in anticipation of another potential disappointment from the NIESR Gross Domestic Product Estimate for April. With the domestic economy continuing to suffer under slowdown pressures and ‘Brexit’-based volatility, the outlook of the Pound remains decidedly muted.
Oil prices also came under renewed pressure thanks to the reopening of production on the Canadian oil sands and expectations of another sharp increase in US crude inventories. With Saudi Arabia pledging to increase its oil production ahead of the sale of shares in the state-owned Saudi Aramco company, Brent crude returned to a weaker footing. This failed to particularly weigh on the ‘Loonie’, however, as the currency benefitted from the relative softness of rivals in the middle of the week.
GBP/CAD Exchange Rate Forecast: Volatility Likely as BoE Decision Approaches
Further Pound Sterling volatility should be expected both ahead of and in response to Thursday’s Bank of England (BoE) policy meeting. Markets are not pricing in any change in policy at this juncture, although the tone taken by policymakers in the meeting minutes could well provide motivation to investors. In the wake of recent disappointing data the case for an interest rate hike even after the June referendum has diminished, as Renuka Fernandez of TD Securities commented:
‘Whilst the BoE have stated they would be less sensitive to data in the run-up to the EU Referendum, the weakness in the data has accelerated and UK rate markets now appear more sensitive to UK data, which could push the spread marginally lower towards our range.’
Should the BoE adopt a more pessimistic tone with regards to its policy outlook the GBP/CAD exchange rate is likely to extend its recent downtrend.
Canadian data will remain more limited ahead of the weekend, although the latest New Housing Price Index could inspire additional support for the ‘Loonie’. Should growth in the domestic housing market be shown to have continued, investors are likely to take a more positive view of the wider economy. Comments from the Bank of Canada’s (BOC) Carolyn Wilkins may equally impact the direction of the GBP/CAD currency pair as markets continue to seek clarity on the outlook of the central bank.
Current GBP, CAD Exchange Rates
At the time of writing, the Pound Sterling to Canadian Dollar (GBP/CAD) exchange rate was slumped in the region of 1.8623, while the Canadian Dollar to Pound Sterling (CAD/GBP) pairing was trending higher around 0.5364.