Foreign Currency Market Update – GBP / CAD Update
As the Chinese stock markets resumed a downtrend upon reopening last week the global commodity market returned to a state of marked fluctuation, to the detriment of the ‘Loonie’. While Tuesday saw the announcement of a new ‘circuit breaker’ mechanism for the Shanghai index, a measure designed to halt trading once a certain level of daily movement is reached, the rally this news prompted was ultimately short-lived. While share volatility has negatively impacted the ‘Loonie’ in recent weeks, the primary concerns weighing upon the currency remain the current global glut and significantly declining levels of demand within the Asian sphere, a fact of which investors remain aware.
Ahead of Wednesday’s Bank of Canada (BoC) Rate Decision the GBP/CAD exchange rate began to uptrend, as traders waited to gauge the tone of domestic policymakers following the confirmation of Canada’s state of recession and continued commodity worries. While forecasts anticipated a decision to hold interest rates at 0.5%, what was not expected was the relative confidence of the accompanying statements. These indicated that further monetary loosening is not considered necessary at this point and that the BOC remains fairly optimistic about the outlook of the Canadian economy, providing a boost to the ailing ‘Loonie’ and weighing down the GBP/CAD pairing to reach a low of 2.0250.
An as-expected New Housing Price Index for Canada on Thursday, which held steady at 1.3%, was overshadowed by the release of the Bank of England (BoE) Rate Decision and meeting minutes for September. The Monetary Policy Committee (MPC) voted 8-1 in favour of maintaining the interest rate at 0.5%, a move that was of little surprise to pundits, but the accompanying minutes revealed that discussions had been of a more hawkish tone than thought. Faith was stated in the continued recovery of the domestic economy and the potential for a near-term rate hike, inspiring a resurgence in the GBP/CAD conversion rate that elevated it to a near-weekly peak of 2.0496.
Friday saw the downward revision of the BoE 12-month Inflation Forecast, from 2.2% to 2%, trigger a limited reversal in trend for the pairing. However, the ‘Loonie’ was unable to sufficiently take advantage of Sterling’s softening due to another blow to the oil industry and its longer-term prospects. Analysts at Goldman Sachs made the suggestion that prices could fall as low as $20 a barrel in the next year due to an increased global oversupply and more significant declines in demand from China in particular. Although the International Energy Agency was quick to issue a counterpoint that general stockpiles were in fact decreasing this was not enough to prevent Brent crude from dipping below $48, with investors taking a more bearish view of the situation.
It seems likely that this data will weigh on the commodity-correlated Canadian Dollar, with banks such as Morgan Stanley and Barclays coming out in support of this more pessimistic assessment. Further pressure, however, stands to mount on oil prices in the run-up to Thursday’s Federal Open Market Committee (FOMC) Rate Decision as speculation over the possibility of a hike remains elevated. Tightening from the Fed would have a severe impact upon the oil market, as the increased strength of the ‘Greenback’ would damage many oil-importing economies and lead to a further reduction of global demand.
Heads Up
Summary of major upcoming data releases that we think may move the market.