A prolonged slide in crude oil prices, largely in response to ‘Brexit’ fears, allowed Pound Sterling to make steady gains over the past seven days.
Pound (GBP) Recovery Begins as Referendum Debate Takes a Tragic Turn
The referendum debate took a horrible and unexpected turn on Thursday when Labour MP Jo Cox was brutally murdered while meeting constituents. Referendum campaigning was suspended for three days as a show of respect for Cox. A furious debate erupted over whether or not the killing was politically motivated and linked to the referendum; Cox was a ‘Remain’ supporter who campaigned for greater support for Syrian refugees, while her killer had multiple links to far-right extremist groups.
The markets recovered on the belief that Cox’s death would galvanise support for the values she stood for, swaying voters towards the ‘Remain’ case. GBP/CAD has made steady gains since, rising from a 17-month low of 1.8075 to a three-week high of 1.8854. Polls at the beginning of this week have shown that support for the ‘Leave’ campaign has reversed, with ‘Remain’ either drawing back level or extending a lead.
Persistent Oil Decline Weakens Canadian Dollar (CAD)
Crude oil has been mostly on the downtrend for the past few days. ‘Brexit’ fears gripped the global markets, causing traders to move away from risky assets and commodities. An overall downtrend, which started on the 8th, saw Brent crude drop from US$52.51 to US$47.19 during a consistent eight-day decline. The Canadian Dollar fell in response, with the week’s data offering little support. Although manufacturing sales rose 1% in April, 0.4% above forecast, existing home sales declined -2.8% in May after the previous month’s 3.1% growth.
Even supportive statements from Bank of Canada (BOC) Governor Stephen Poloz failed to help the Canadian Dollar recover much ground. While cautious, Poloz claimed that there were reasons to be positive on the outlook for the Canadian economy.
‘It does seem that our core forecast narratives around the U.S. economy and around Canada’s exports remain intact. Continued patience is required, but we have the right to be optimistic,’ he said.
Pound Sterling to Canadian Dollar Advances; Polls Mixed but Confident Banks Reject Emergency Cash
GBP/CAD has received a further boost today, rising to its highest level since the beginning of the month. Two new polls have been released, although the results are contradictory. An ORB survey shows that ‘Remain’ has returned to the lead for the first time in four weeks, leading over ‘Leave’ with 53% of support to 46%. However, the latest YouGov poll gives ‘Leave’ a 2% lead over ‘Remain’ with 51% of the support.
Confidence is still rising, though, after the UK’s banks largely rejected the latest liquidity auction from the Bank of England (BoE). The BoE was offering to buy long-term assets on a short-term repo rate to provide city banks with the liquid cash they need to keep operating normally during what promises to be frantic trading on Friday. However, the UK’s financial institutions only bought £370 million at today’s auction; the smallest take-up since January 2015. This suggests that the city is largely confident in either the levels of its liquid assets, or that the likelihood of a vote for ‘Brexit’ is waning.
The Canadian Dollar, meanwhile, has once again weakened due to the oil market switching back into bear-mode following a two-day gain. So far the ‘Loonie’ has remained impervious to the strengthening effect of a client note by Raymond James & Associates, predicting WTI oil will strengthen to US$80 per barrel by 2017:
‘Over the past few months, we’ve gained even more confidence that tightening global oil supply/demand dynamics will support a much higher level of oil prices in 2017,” the team says. “We continue to believe that 2017 WTI oil prices will average about $30/barrel higher than current futures strip prices would indicate.’
GBP/CAD Exchange Rate Forecast
There is no UK data set for release until Friday, when the BBA Loans for House Purchase figures will be published. Considering this will be not long after the predicted announcement of the final referendum vote count, it is almost certain that the data will be completely ignored by traders and economists alike.
With Canada largely insulated from ‘Brexit’ fears, the Canadian Dollar belongs to a minority of global currencies that may be able to continue performing as per usual during the next few days. Retail sales tomorrow could boost the ‘Loonie’, especially as they are forecast to show a 0.8% rise during April. There is no further Canadian data due until next Thursday.