A combination of US Dollar strength, improved Federal Reserve rate hike bets, uninspiring domestic data and falling oil prices has seen the Canadian Dollar weaken versus most of its major peers.
Oil Prices Drop Back Below $50 a Barrel
Although crude oil prices broke through the $50 a barrel barrier last week, concerns of global oversupply continue to weigh on prices. Even Canada’s significantly reduced output, as the wildfire tore through the oil sands region, wasn’t enough to sustain crude oil price gains. This is likely because crude hitting $50 a barrel eased pressure on OPEC to force reduced output.
During Tuesday’s European session crude edged below the $50 mark amid robust Middle Eastern output. Industry sources familiar with the matter stated that Iran will add five million barrels of additional crude to its international oil company partners in June.
Federal Reserve Rate Hike Bets Improve
Also weighing heavily on demand for the Canadian Dollar are increased bets of a near-term rate hike from the Federal Reserve. Recently Chairwoman Janet Yellen suggested that a rate hike was now ‘appropriate’, fuelling hopes that there will be a modest increase in June.
The resultant US Dollar appreciation following a rate hike is bad for Canada as it will limit profitability from cross-border trade. Additionally, tighter Fed policy outlook will widen the divergence between the US central bank and the Bank of Canada (BOC), with many expecting at least one BOC rate cut to come in 2016.
GBP/CAD Exchange Rate Rallies on Easing ‘Brexit’ Uncertainty
Meanwhile, the British Pound has enjoyed a broad-based rally in response to easing ‘Brexit’ concerns as opinion polls seem to favour the remain vote. Even mounting concerns of weak second-quarter domestic growth hasn’t been enough to offset Sterling gains.
On Tuesday the UK Pound was mostly static versus its rivals thanks to an absence of influential domestic data and an opinion poll suggesting that the EU referendum vote will be very close. However, the GBP/CAD exchange rate continued extending gains after Canadian growth data produced mixed results.
On the year, March’s annual Gross Domestic Product failed to meet with expected growth. Better-than-expected quarterly expansion wasn’t enough to offset ‘Loonie’ (CAD) losses, however, despite improved market sentiment following significant Asian stock price gains.
CAD Exchange Rates Predicted to Struggle
The GBP/CAD exchange rate is likely to continue holding a position of strength as falling crude prices, US Dollar strength and speculation of BOC policy easing reduced the appeal of the Canadian Dollar.
However, US ecostats will likely play a significant role in ‘Loonie’ movement and weak results could spur CAD gains. In addition, the GBP/CAD exchange rate may be negatively impacted if ‘Brexit’ jitters return in the run up to the June 23rd vote.
Wednesday’s Canadian Manufacturing PMI will be the domestic publication most likely to cause CAD exchange rate changes this week.
Heads Up
Summary of major upcoming data releases that we think may move the market.