Following the Federal Open Market Committee’s (FOMC) decision to raise interest rates by 0.25% last week the Canadian Dollar saw a limited uptick against the Pound, bolstered by the relative dovishness of comments from Fed Chair Janet Yellen. As the policymaker chose to highlight the data-dependent and likely gradual nature of any future rate hikes markets reacted favourably. With the impact of such a move already priced into the US Dollar, this less hawkish than expected outlook prompted an increase in risk demand that benefitted the commodity-correlated ‘Loonie’.
However, the Pound Sterling to Canadian Dollar exchange rate soon returned to form after November UK Retail Sales were found to have greatly exceeded forecasts. Likely boosted by the Black Friday discounts, consumer spending increased by 3.9% rather than the expected 2.3%, shoring up demand for the Pound.
The GBP/CAD pairing was also pushed higher ahead of the weekend on the back of the latest Canadian Consumer Price Index. Baseline domestic inflation disappointed expectations in spite of showing an uptick on the year, clocking in at 1.4% instead of 1.5%, as inflation on the month slipped into negative territory. This less impressive showing was not thought to bode particularly well for the outlook of the Canadian economy, particularly as global slowdown pressures and other downside risks are unlikely to diminish in the early months of 2016.
Oil supply glut worries have weighed on the Canadian Dollar this week, with Brent crude having plunged to its lowest level since July 2004 at just $36.05 per barrel. The benchmark sank below the prices hit during the 2008 global recession as pundits continued to sell out of the commodity after the Organisation of the Petroleum Exporting Countries (OPEC) failed to agree a production cap. Markets are concerned that the lifting of sanctions on Iran will lead to a further rise in global production, which is already at record highs despite a decline in demand.
Nevertheless, the Pound was equally dragged down on Tuesday after the release of the November Public Sector Net Borrowing report. Demonstrating that government debt had increased by 13.6 billion Pounds in the last month, rather more than the 11.1 billion that traders had expected, this suggested that Chancellor George Osborne will struggle to meet the fiscal targets set out in his Autumn Statement. Consequently Sterling slumped across the board, with the GBP/CAD exchange rate falling to a multi-day low of 2.0624.
While Wednesday’s finalised third quarter UK GDP showed a negative revision from 2.3% to 2.1% the Pound returned to more bullish form against the ‘Loonie’. This was largely due to the continued softness of crude oil prices which, in spite of recovering from Monday’s lows, have remained in weaker territory. As OPEC has predicted that demand will shrink there has been limited incentive to buy into the Canadian Dollar ahead of Christmas.
Heads Up
Summary of major upcoming data releases that we think may move the market.