Foreign Currency Market Update – GBP / CAD Update
If you have Canadian Dollar-denominated assets, your view on the future prospects of your holdings will largely depend upon whether you are a ‘glass half empty’ or ‘glass half full’ sort of person. There is plenty to suggest that this one might go either way.
The major economic issue of our day is Greece’s potential exit from the eurozone and the outcome of ongoing discussions between the European Central Bank (ECB) and Athens are likely to have a pronounced effect on how the export-driven Loonie fares over coming months. The debt-addled Hellenic state’s new left-wing leaders staged a whistle stop tour of Europe’s financial capitals in the immediate aftermath of their late January election victory; however their efforts to encourage the euroland’s policymakers to soften their stance on the terms of Greece’s €240bn bailout appear to have had little success.
Thursday’s announcement from the ECB that it will be restricting the level of finance which it makes available to the nation’s retail banks sent out a clear message. Athens now has just over a week to firm up a deal with Brussels on re-jigging the terms of its current obligations. Wednesday 18th February – when the euroland’s central bank board members vote on whether to turn off the tap on its Emergency Liquidity Assistance programme – looks likely to represent D-Day for Greece.
Many respected commentators have taken a pessimistic view on the likely outcome of the ‘Greek Problem’. Former US Federal Reserve Chairman Alan Greenspan stated yesterday that he can’t see how the debt row, ‘will be resolved without Greece leaving the eurozone’. He went on to predict that such a move would likely be a portent for a breakup of the eurozone as a whole, with the only possible means of the single currency area saving itself being via a highly improbable all-out political integration. If Greenspan is correct, then the Pound Sterling is likely to strengthen against the Canadian Dollar, sending GBP CAD up towards the 2.0725 which it touched off at the height of the global financial crisis in 2008.
However, the past week has been far from doom and gloom all the way for the Loonie. January’s unexpected interest rate cut by the Bank of Canada came as a gut-punch to CAD-holders, but subsequent days have seen other major global central banks follow suit and loosen their respective policy stances. The Reserve Bank of Australia trimmed its key interest rate last Tuesday and New Zealand’s central bank hinted that it may also be preparing to cut; the generalised move towards lower rates means that the Bank of Canada appears less out on a limb in its decision to cut than was previously the case.
Meanwhile, a sharp increase of over 20% in the price of a barrel of Brent Crude since the final week of January and last Friday’s highly positive US job creation figures also strongly favoured the Canadian Dollar. If the move higher for ‘Black Gold’ persists, triggering a renewed downside move for GBP CAD, then the pair has the potential to drop towards its November low of 1.7542.
Heads Up
Summary of major upcoming data releases that we think may move the market.