Recent wildfires, billed as the most costly Canadian economic disaster in history, have caused significant volatility in the GBP/CAD exchange rate during the past seven days.
GBP Soft as Bank of England Enters ‘Brexit’ Debate
While Bank of England (BoE) Governor Mark Carney has already made waves in the EU referendum debate after calling a ‘Brexit’ the biggest internal risk to UK financial stability, he provoked further anger after the latest BoE monetary policy statement. The BoE warned that a split from the EU could cause growth to slow, inflation to rise and even tip the UK into recession. ‘Leave’ campaigners were furious with the BoE Governor, claiming the BoE had overstepped the mark.
However, many hailed the move as a victory for transparency. According to Carney, the consensus among the members of the Monetary Policy Committee (MPC) was that a ‘Brexit’ would have negative short-term consequences for the UK economy. He argued that it was the Bank’s duty to inform the public of their expectations and that not doing so in order to remain impartial would have compromised their integrity.
There was plenty of controversy from the ‘Leave’ side of the debate as well, after Boris Johnson caused a furore by comparing the aims of the EU to those of Adolph Hitler.
The Pound Sterling to Canadian Dollar exchange rate closed on Tuesday having recouped the losses made during the past seven days.
Wildfires Curb Canadian Oil Sands Production, Weakening CAD
Fires in Alberta, a key oil producing region of Canada, have weakened the Canadian Dollar over the past week, allowing GBP/CAD to advance. The blaze passed through the city of Fort McMurray, destroying nearly 2,000 homes. 100,000 residents had to be evacuated and oil sands companies were forced to cut or suspend production in the face of the advancing flames. Experts predicted that Canada’s oil production was cut by a third, making the wildfire the second biggest disruption to global oil production this year. Even once passed the key oil sands regions, commentators expected the blaze would take an entire year to bring fully under control.
The Canadian Dollar was further weakened after economists suggested that the economic impact of cut production would not be confined to Alberta, but would affect the economy on a national scale. A number of economists, including those representing several major banks, have downgraded their economic outlook for 2016. While some of the forecasts take into account other weakening factors, TD attributed -0.2% of its cut to Canada’s GDP forecast to the impact of the wildfires, while CIBC cut its outlook by ten basis points, solely because of the fires.
GBP/CAD Advances on Canadian Re-evacuation Orders, despite Poor UK Inflation
Tuesday saw UK inflation data disappoint forecasts, although the market reaction suggested traders had held a different outlook to economists. Annual inflation slowed from 0.5% to 0.3%, while the core index slipped from 1.5% growth to 1.2%. Although below forecast, Pound Sterling managed to retain a position of strength against most of the majors, although its gains were softened slightly by the news.
This is likely because the previous month’s inflation increase was mostly due to rising prices for clothing and air travel, which were buoyed by the Easter shopping period. Markets may therefore have been expecting a decline in the CPI, suggesting the fall is more of a correction than a slowdown in inflation.
The GBP/CAD exchange rate remained within a few pips of the recent seven-week high, trending at 1.8724, after Fort McMurray residents were warned to evacuate again on Tuesday thanks to fears of a resurgence in the wildfires. 8,000 workers have already had to leave the oil sands camps to the north of the city, suggesting Canadian oil production could be about to take another hit.
GBP/CAD Exchange Rate Forecast: UK Wage Data to Provoke Volatility
Wednesday’s UK labour market data could spark significant movement for Pound Sterling. Wage growth remains muted, which many see as a signal that the BoE will hold off on interest rate hikes for some time. If the figures show the marginal tick lower in average weekly earnings expected, Pound Sterling could fall substantially.
With little impactful data due out until the end of the week, the continuing progress of the wildfire is likely to drive sentiment towards the Canadian Dollar. On Friday, however, the focus will return back to data, with the latest consumer price index figures due to be released.
At the time of writing, the GBP/CAD exchange rate trended between 1.8604 and 1.8744, while the CAD/GBP exchange rate traded between 0.5331 and 0.5369.
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