GBP/CAD trading has been particularly volatile since the start of February as markets have struggled to shake off the bearishness that has plagued sentiment since the turn of the year. While oil has recovered from a thirteen-year low to remain above the $30 a barrel mark, a lack of agreed production cuts and growing fears of a global slowdown have prevented the commodity from holding any significant gains.
The ‘Loonie’ gained some respite, however, as a raft of softer US data encouraged speculation that the Federal Open Market Committee (FOMC) would take a more gradual approach towards monetary tightening than previously expected. Some pundits have been concerned that December’s Fed rate hike is at least partly to blame for the market’s current state of risk aversion, with a slower pace of interest rate increases likely to calm investors somewhat. As the strengthening US Dollar has been weighing heavily on commodity prices, and consequently helping to erode the Canadian Dollar, the suggestion that the FOMC might hold off on another hike for the foreseeable future prompted a limited rally.
Dovish BoE Pushed GBP/CAD Exchange Rate Lower
Investors were not encouraged by the dovishness of the Bank of England (BoE), however, as policymakers voted unanimously in favour of leaving interest rates unchanged. With former dissenting hawk Ian McCafferty now back in the fold the likelihood of the BoE achieving a rate hike in 2016 dropped sharply, diminishing the appeal of the Pound. The downwards revision of the bank’s inflation projections also prompted traders to move away from Sterling, wiping out the gains made on the back of Wednesday’s stronger-than-expected UK Services PMI.
There was some uncertainty over how to react to Friday’s US Non-Farm Payrolls report, as the data proved too mixed to adequately predict the reaction of the Fed. While the disappointing employment gain figure seemed to underscore a weakening of the world’s largest economy this was contrasted by an unexpected dip in the Unemployment Rate and stronger wage growth. As wages are one of the key factors considered by the Fed in assessing monetary policy this saw the US Dollar gain sharply.
Adding downward momentum to the ‘Loonie’ was the latest Canadian employment data, which showed an unanticipated decrease in the number of employed that pushed the domestic unemployment rate up to 7.2%. This disappointing result indicated that the Canadian economy was not in as strong a state as the Bank of Canada (BOC) might have hoped, reigniting speculation that the central bank might choose to cut interest rates in the near future.
‘Brexit’ Uncertainty Allows Canadian Dollar to Advance
After the weekend ‘Brexit’ concerns have been weighing more heavily on the GBP/CAD currency pair, as debate intensifies over the UK’s future in the European Union. Uncertainty over the outcome of the upcoming referendum has generally reduced the appeal of Sterling, particularly as the BoE is unlikely to take a more hawkish view on interest rates ahead of the vote. Even an improved visible trade deficit, which narrowed from -11.5 billion to -9.9 billion Pounds in December, has failed to incentivise investors to favour the Pound.
Despite persistent market volatility the Canadian Dollar rallied on Tuesday, buoyed by an unexpectedly solid recovery in domestic Building Permits. Indicating that the local housing market is strengthening, this report has kept the ‘Loonie’ on more bullish form, with the commodity-correlated currency likely to make further gains later in the week if Fed Chair Janet Yellen takes a dovish tone with regards to the central bank’s future interest rate policy.
Heads Up
Summary of major upcoming data releases that we think may move the market.