An unfortunate combination of heightened safe-haven demand and falling commodity prices is likely to cause the Canadian Dollar to soften considerably over the coming days.
Canadian Dollar Falls on Safe-Haven Demand
With commodity prices having declined significantly of late, in conjunction with risk-off trading in response to global economic difficulties, the Canadian Dollar has struggled versus its major peers. A slight appreciation last week came in response to a dovish speech from Federal Reserve Chairwoman Janet Yellen. However, with policy divergence still wide between the Bank of Canada (BOC) and the Federal Reserve, ‘Loonie’ (CAD) gains were short-lived.
On Monday the Canadian Dollar weakened further as safe-haven demand was amplified by leaked information related to Panama-based law firm Mossack Fonseca. The data leak has led to serious allegations of tax avoidance, tax evasion and money laundering connected to a number of government officials from around the globe. Whilst there is currently no evidence to support wrong-doing at this time, any sign that these prominent figures were acting illegally will have serious ramifications.
Additional ‘Loonie’ losses can be linked to falling crude oil prices. ‘Black gold’ declined after Saudi Arabia announced that it would only freeze oil production if Iran agrees to do the same. Given that Iran has only very recently had sanctions on production lifted, there is a very remote chance that all the great oil-producing nations will agree to a production freeze.
Pound Sterling Stronger despite Weakest Construction Growth since 2013
Last week the British Pound struggled versus a number of its major peers after the UK steel crisis added to political uncertainty initiated by the EU referendum. Indian conglomerate Tata Steel announced intentions to sell its UK operations and withdraw from Britain altogether. This would mean massive job losses and potentially the end of the British steel industry.
However, on Monday the Pound Sterling gained versus nearly all of its major peers. This is despite reports that several British officials have been named in the leaked ‘Panama Papers’ documents. The lack of Sterling reaction to the news of potential tax fraud can be linked to the fact that recent depreciation has already undervalued Sterling.
The Pound also advanced in response to March’s Construction PMI which defied expectations of a drop from 54.2 to 54.1, with the result actually holding at 54.2. Whilst the better-than-expected result has supported demand for the Pound, construction output remains at its weakest level since the summer of 2013.
GBP/CAD Exchange Rate Forecast: Will Weak Crude Prices Continue to Provoke ‘Loonie’ Losses?
Given that crude oil prices are showing little sign of a swift recovery, there is a high chance that the Pound Sterling to Canadian Dollar (GBP/CAD) exchange rate will hold gains. With that being said, the mounting political uncertainty as a result of the EU referendum and steel crisis may cause the Pound to resume depreciation.
There will be a number of significant ecostats with potential to cause GBP/CAD changes this week. For those invested in Sterling the most significant data publication is likely to be Tuesday’s Services PMI. The services sector accounts for the single largest portion of British Gross Domestic Product and remains one of the principle drivers of growth.
In terms of Canadian data worth watching, Friday’s Unemployment Rate and Net Change in Employment reports will be of significance.
Over the past seven days, the Pound Sterling to Canadian Dollar (GBP/CAD) exchange rate was trending within the range of 1.8490 to 1.8849.
Heads Up
Summary of major upcoming data releases that we think may move the market.