Foreign Currency Market Update – GBP / CAD Update
Oil price volatility has continued to dominate sentiment towards the Canadian Dollar in the last week, with markets remaining nervous in the wake of Brent crude touching an eleven-year low of $36.04. As Canadian economic data has been relatively limited due to the Christmas holiday there has been little to distract traders from the discouraging outlook of oil in the coming year, with some forecasts still suggesting that the weakening commodity has yet to bottom out. With the Organisation of the Petroleum Exporting Counties (OPEC) on track to expand its production further in 2016 in order to safeguard its market share pundits are increasingly concerned that the global oil glut is unlikely to subside for some time to come.
The prospects of the wider Canadian economy also failed to offer reassurance to traders as the October GDP and Retail Sales figures both fell short of forecast. Although consumer demand had improved on the month, rising from -0.4% to 0.1%, this more positive indication was outweighed by a more disappointing GDP. Domestic growth slipped -0.2% on the year in October, suggesting that Canada remains in a more fragile state as negative global headwinds mount.
However the Pound Sterling to Canadian Dollar exchange rate was unable to substantially capitalise on the ensuing ‘Loonie’ (CAD) weakness, with demand for the Pound dented by a weaker-than-expected third quarter UK GDP. With Public Sector Net Borrowing having also shown a greater widening in government debt there has been increasing speculation that Chancellor of the Exchequer George Osborne will be unable meet the fiscal targets set out in his Autumn Statement.
Monday saw Brent crude stage a significant rally as colder winter conditions in Europe and the US were predicted to boost demand for oil in the coming month. Consequently the Canadian Dollar strengthened sharply, helped higher by the lower trading volumes of the holiday season, as pundits hoped that some of the current supply glut might be eroded. Nevertheless, this surge of strength was ultimately short-lived due to indications that temperatures would soon return to a warmer range.
While heavy rain and floods have ravaged the UK this week there has been little particular incentive to buy into the Pound, with 0.25% expected to be shaved off the nation’s GDP as a result of the damage caused to infrastructure. As Deutsche Bank yesterday suggested that Sterling was the world’s most overvalued currency and the IMF has issued a warning that global growth is likely to underperform in 2016 investors have been inclined to take a more bearish approach. Worries have also been raised as a result of the latest Nationwide House Prices report offering further evidence that the UK property market is in a bubble.
Movement for the Pound and ‘Loonie’ is expected to be more limited ahead of the weekend as the New Year approaches, although continuing developments in the oil market are likely to continue weighing on the Canadian Dollar. Into next week a raft of fresh PMIs could shore up demand for Sterling, with the UK services sector forecast to have demonstrated stronger expansion on the month in December.
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Summary of major upcoming data releases that we think may move the market.