Foreign Currency Market Update – GBP / CAD Update
In spite of domestic data being relatively limited for the Canadian Dollar over the last week the GBP/CAD exchange experienced some decided volatility, largely driven by oil price fluctuations and mixed UK economic figures.
Sentiment towards the Pound turned decidedly bearish on Tuesday with the release of the September UK Consumer Price Index, which unexpectedly weakened to -0.1%. Demonstrating that the domestic economy had entered a state of negative inflation, this did not bode especially well for the odds of the Bank of England (BoE) turning more hawkish before the end of the year. Economists were generally encouraged to push back their estimates for the date at which the BoE would begin the cycle of monetary tightening, with some suggesting that the move would not come until 2017 as a result of this unimpressive inflationary data. Substantially slumping in response, the GBP/CAD exchange rate fell to a three-month low of 1.9774.
However, the downturn was ultimately not long-lived thanks to the raft of UK employment data published the following day. While the Jobless Claims Change figure disappointed, defying expectations of a decline to show an increase of 4,600 people on unemployment benefits, this was outweighed by an unexpectedly strong showing in the ILO Unemployment Rate. In the three months to August the number of unemployed persons in the UK fell to 5.4%, the lowest reading for the measure in seven years. Coupled with a sustained uptrend in Average Weekly Earnings, albeit at a slightly slower rate than forecast, this led to a resurgence in BoE rate rise bets as pundits anticipated that the central bank would feel an increased pressure to tighten interest rates in order to keep pace with wage growth. As a result the GBP/CAD pairing surged to a fortnightly best of 2.0079.
Oil prices had previously been seeing an uptick in the earlier week as the latest gauge of US stockpiles revealed a far larger build-up than anticipated this saw Brent crude trend back below the $50 mark. In spite of recent optimism that the global supply glut could ease over the next year, thanks to indications that Russia was willing to enter into talks about output with other major oil-producing nations, this kept the commodity on a generally weaker footing throughout the remainder of the week.
The ‘Loonie’ was also weighed down by the September Canadian Existing Home Sales figure, which showed a sizeable contraction of -2.1% on the month. Suggesting that the domestic economy remains in a more fragile state, this did not offer much reassurance to traders, particularly as bets intensified once again over the possibility of December interest rate hike from the Federal Open Market Committee (FOMC). With the chances of an imminent divergence between the monetary policies of the neighbouring nations, this saw the risk-sensitive Canadian Dollar ceding further ground ahead of the weekend.
Upcoming Canadian data is not expected to be particularly supportive for the ‘Loonie’, with the domestic Retail Sales and Consumer Price Index figures both expected to show declines as the local economy continues to slow. Wednesday’s Bank of Canada (BOC) Rate Decision is not forecast to show any change in interest rates, however, the accompanying commentary from policymakers will be of keen interest to investors. Should a more dovish tone be struck then the ‘Loonie’ is likely to see a decided weakening in demand.
Heads Up
Summary of major upcoming data releases that we think may move the market.