Markets did not appear overly sure of how to react to the first federal budget of Canadian Finance Minister Bill Morneau, giving the Canadian Dollar something of a rough ride as a result. While the liberal budget has pledged a significant raft of investment and stimulus measures to support the domestic economy, some economists were unimpressed. This was largely due to the fact that Morneau’s budget is built on the basis of deficit financing, a prospect that has raised some concerns giving the flagging nature of Canada’s economy.
Demand for the risk-sensitive ‘Loonie’ was also driven down by the unexpectedly hawkish rhetoric delivered by various members of the Federal Open Market Committee (FOMC) over the course of the week. Despite the more cautious outlook of the March policy meeting several policymakers expressed the belief that interest rates could, or should, be raised as soon as April. Reigniting speculation over the likelihood of further Fed tightening, this pushed the Canadian Dollar lower against rivals.
Pound Sterling, meanwhile, remained in somewhat muted spirits following disappointing Consumer Price Index and Public Sector Net Borrowing figures. As inflationary pressure failed to rise on the year in February markets were inclined to push back their expectations for a Bank of England (BoE) move on interest rates further. Investors were also discouraged by the revelation that the UK government had borrowed more than forecast in February, putting Chancellor George Osborne in serious danger of breaching his 2015-2016 borrowing target.
Oil Returns to the Back Foot after High US Inventories
While oil had been holding a relatively stable trend above the $40 per barrel mark on the announcement that members of OPEC would be meeting to discuss production in April, this optimism was not to last. Investors were disappointed to find that the latest US crude oil inventories had risen substantially further than forecast, adding 9.3 million barrels rather than the 2.5 million anticipated. As a result confidence in the commodity was shot through, and has consequently remained in something of a slump.
Stronger-than-expected UK Retail Sales also shored up the GBP/CAD exchange rate on Thursday, showing a more limited contraction on the month than investors had anticipated. Retail spending in February only slowed from 5.1% to 4.1%, rather than the 3.4% that had been forecast. Thus, in spite of weaker underlying trends, this helped to bolster the Pound ahead of the Easter long weekend.
Dovish Fed Commentary Encourages Risk Appetite
With the Canadian Producer Price Index demonstrating a sharp contraction in the price of raw materials the inflationary outlook of the domestic economy does not appear overly encouraging at this juncture. Clocking in at -2.6%, as opposed to -0.4% in January, this weaker result naturally encouraged the ‘Loonie’ to shed further value.
However, as Fed Chair Janet Yellen put pay to speculation that the Federal Reserve could be considering an interest rate rise as soon as April the risk-sensitive Canadian Dollar surged strongly in response. With the Pound also weighed down by the potential collapse of the UK steel industry this has seen the GBP/CAD exchange rate trending lower on Wednesday morning.
Of particular note in the coming days will be the latest Canadian GDP report, which is expected to show that the economy experienced a sharp uptick in growth at the start of the year. Should Canada’s economy fail to have shown substantial improvement in January, however, the ‘Loonie’ could return to a weaker footing.
Heads Up
Summary of major upcoming data releases that we think may move the market.