Foreign Currency Market Update – GBP / CAD Update
Although the GBP/CAD exchange rate had started last week on a relatively strong uptrend this was not to last long as Tuesday’s third quarter UK Gross Domestic Product report severely disappointed investors. While economic growth was anticipated to have slowed on the quarter the decrease was slightly more pointed than pundits were prepared for, particularly as growth on the year also unexpectedly weakened. Suggesting that the domestic economy was not recovering so well as might have been hoped, this prompted economists to dial back their expectations for a near-term interest rate rise from the Bank of England (BoE). As a result, the GBP/CAD pairing slumped to a weekly-low of 2.0072.
Wednesday saw a strong resurgence in oil values, as US stockpiles were revealed to have risen by less than forecast and with a far less significant jump in barrels than the previous month. This timely news somewhat eased market fears of the persistent global supply glut, even as the longer-term outlook of the commodity remained generally grim. While this helped to buoy the Canadian Dollar further and prevented the GBP/CAD exchange rate from particularly recovering ground, the bullish ‘Loonie’ run was soon dented.
Traders were unsurprised by the Federal Open Market Committee (FOMC) decision to leave interest rates unchanged at the central bank’s October policy meeting. However, markets were quick to react to the more hawkish tone of the accompanying statement from policymakers, as the probability of a December interest rate rise was seen to have risen substantially. With demand for the US Dollar increased markets turned towards a state of risk aversion, with pundits discouraged from buying into higher-risk assets and concerned of the negative impact imminent monetary tightening from the US might have upon the more fragile wider global economy.
While later US data did not prove overly supportive, with the third quarter GDP in particular proving weaker than expected, the Canadian Dollar remained in relatively muted form ahead of the weekend. Friday’s Canadian GDP failed to show as much improvement on the year as forecast, printing at growth of 0.9% rather than 1.0%. With the month-on-month reading slowing there was little encouragement for traders of the ‘Loonie’.
Following better-than-anticipated expansion in the UK Manufacturing PMI on Monday morning the GBP/CAD exchange rate has extended its gains further. Domestic sector output defied expectations of a slight downturn to soar from 51.8 to 55.5, suggesting that manufacturers experienced a particularly strong month in October. There has been some caution over the figure, however, as economists have generally remained wary that this turnaround will be sustained in the rest of the quarter.
Greater volatility on the GBP/CAD pairing can be expected towards the end of the week, with the upcoming Bank of England (BoE) Rate Decision and Canadian Net Change in Employment data. Should British policymakers echo the more hawkish tone of the Fed sentiment towards the Pound could strengthen considerably with bets of a nearer-term interest rate move. As the number of Canadians in employment is expected have risen by a smaller degree than in September the ‘Loonie’ may well continue to soften, especially if any of the week’s US data prints strongly.
Heads Up
Summary of major upcoming data releases that we think may move the market.