While it might have been expected that last Tuesday’s weaker-than-forecast Chinese Manufacturing PMI would have precipitated a sharp increase in market risk aversion this was ultimately not the case. With the Chinese manufacturing sector continuing to sink into contraction territory, investors became increasingly confident that the People’s Bank of China (PBoC) would be prompted to introduce fresh economic stimulus measures. As a result, risk sensitive currencies including the Canadian Dollar strengthened throughout the day, with the price of oil also surging as confidence improved.
The ‘Loonie’ was shored up further by a better-than-expected domestic GDP report, which showed that the domestic economy had grown by 0.8% in the fourth quarter rather than stagnating as traders had anticipated. Improving hopes that the Bank of Canada (BOC) will not loosen monetary policy imminently helped to push the GBP/CAD exchange rate to a fresh nine-month low of 1.8687.
This downtrend was supported by disappointing UK Construction PMI, which slipped from 55.0 to 54.2 in February. Given the weaker nature of the corresponding Manufacturing PMI this did not appear to bode well for the strength of the UK economy or for first quarter GDP.
Sharp Increase in Crude Inventories Dented Canadian Dollar
Nevertheless, the GBP/CAD exchange rate soon returned to more bullish form as US crude oil inventories spiked. Rather than showing a modest increase of 3,400,000 barrels, US stockpiles rose by a rather more substantial 10,374,000, reaffirming the severity of the current global supply glut. Consequently both Brent crude and the Canadian Dollar slumped sharply, reversing recent gains.
Wednesday’s UK Services PMI proved an even greater disappointment for traders, as sector expansion slowed markedly from 55.6 to 52.7. Given that the service sector remains the primary driver behind the UK economy, contributing 70% of the country’s GDP, this was a particularly discouraging result. As ‘Brexit’ uncertainty is set to remain a persistent drag on the domestic economy ahead of June’s membership referendum this weaker showing did little to improve the appeal of the Pound.
However, ahead of the weekend, the GBP/CAD currency pair continued to trend higher as markets prepared for the latest US Non-Farm Payrolls report. While the number of new jobs added to the US economy in February was ultimately stronger than expected this was contrasted by weaker wage growth, muddying the waters and seeming to diminish the odds of another imminent Fed rate hike. With the Fed less likely to continue tightening policy the pressure on the BOC to ease seemed to decrease, bolstering the ‘Loonie’ against rivals.
Canadian Dollar Volatile ahead of BOC Rate Decision
Oil rebounded once again at the start of the week, charging back towards the $40 per barrel mark as markets continued to demonstrate optimism. These gains were not ultimately sustained for long, however, as a raft of poor Chinese trade data severely dampened sentiment on Tuesday morning. With Chinese exports and imports shrinking markedly, pressure on the commodity has remained high and weighed on the Canadian Dollar.
An unimpressive BRC Like-For-Like Sales report, meanwhile, has dented the strength of Sterling, as consumer demand was demonstrated to have slowed sharply on the year in February. Should Wednesday’s UK Industrial and Manufacturing Production figures indicate that domestic industry picked up at the beginning of the year, the GBP/CAD exchange rate may return to a bullish run. Nevertheless, sentiment towards the ‘Loonie’ is expected to drive the pairing ahead of the BOC’s latest rate decision, with investors hoping that policymakers leave interest rates unchanged.
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