Lessening uncertainty in the UK over the past seven days, coupled with weak data from Canada, has allowed the GBP CAD exchange rate to advance from a low of 1.6702 to today’s high of 1.7167.
UK Property Fund Suspensions Weakens GBP CAD after BoE Financial Stability Report
Tuesday saw the release of several important economic measures from the UK, although it was market developments which weighed heavily on the Pound. The UK services PMI for June worsened slightly more-than-forecast, slipping from 53.5 to 52.3, rather than to 52.8 as predicted. However, after the dire construction industry PMI, investors were relieved the index hadn’t fallen further. The composite index didn’t weaken by as much as expected.
The Bank of England (BoE) also released its Financial Stability Report, in which it observed that certain risks had ‘crystallised’ and stated that;
‘The current outlook for UK financial stability is challenging.’
Despite highlighting multiple risks, investors were cheered by the report; mostly due to the relaxing of capital requirements which freed up £150 billion for the banks to lend. The release of the minutes today shows that this decision was unanimous.
However, further market turbulence overshadowed these positive developments. Multiple UK property investment funds, including those operated by Standard Life, Aviva and Henderson, equating to around £18 billion of the UK’s estimated £25 billion property funds, had suspended redemptions. This meant that investors have been blocked from withdrawing their money – large scale withdrawals lower the value of the fund, prompting other investors to remove their money and so on.
These headwinds helped the Canadian Dollar to strengthen, despite a decline in crude oil prices. Brent Crude averaged around US$47.96 on Tuesday – far below the key US$50 per barrel mark at which many large oil producers become profitable.
Poor Canadian Data Undermines ‘Loonie’ Strength
The Canadian Dollar’s early strength began to wane towards the weekend after a series of poor data releases and further turbulence in the oil markets. On Wednesday the Canadian International Merchandise Trade figure for May showed the second-largest trade deficit on record. Canada’s 21st consecutive monthly trade deficit well-exceeded economist’s forecasts of -CA$2.7 billion to hit -$3.28 billion. Exports dropped -0.7%, with eight out of eleven categories experiencing a decline.
Thursday saw choppy trade, with GBP CAD spiking at 1.6870 before the Canadian Dollar strengthened back to opening levels. Data for the UK was mixed; the Lloyds Business Barometer for June tumbled from 32 to 6, starting the day on a bad note. Industrial and manufacturing production statistics for May all bettered forecasts. Monthly production declined less-than-anticipated, while annualised production greatly bettered expectations. The previous month’s growth was retrospectively revised upwards as well.
Canadian data was mixed, starting with the month-on-month building permits figure for May. This showed a surprise -1.9% decline in permits, despite predictions for 1.5% growth. The previous month’s figure was improved, but only to 0.1%. Later, the Ivey Purchasing Managers Index for June advanced more-than-expected, rising from a seasonally-adjusted 49.4 to 51.7 instead of settling at 51.2 as per forecasts.
Better-than-Expected UK Trade Deficits and Weak Canadian Unemployment Figures Aid Pound Sterling Advance
Friday saw GBP CAD hit its stride. While a GfK survey showed that UK consumer confidence had plunged by the greatest extent in 21 years since the referendum result, the Pound was buoyed by better-than-expected trade figures. All three measures of the UK’s trade deficit were retrospectively downgraded, while the latest figures all came in below their estimates.
Canada’s unemployment data for June softened the Canadian Dollar further. The unemployment rate defied expectations of a rise to 7% to drop to 6.8%, but this was down to a drop in the participation rate, rather than an increase in jobs. In fact, net change in employment declined -0.7k, despite forecasts of a 6.5k increase. The full time employment change index fell from 60.5 to -40.1.
This week, the Pound has continued to strengthen thanks to the abrupt end of the Conservative party leadership contest. Andrea Leadsom unexpectedly bowed out, leaving Theresa May as the winner by default. If all proceeds according to plan, the UK could have its second ever female Prime Minister by the end of today.
Pound Canadian Dollar (GBP CAD) Exchange Rate Forecast; BOC and BoE Interest Rate Decisions Ahead
Two central bank policy decisions will be the key drivers of the GBP CAD exchange rate over the coming days. Tomorrow, the Bank of Canada (BOC) meets to set interest rates. No change to monetary policy is predicted, but the accompanying Monetary Policy Report could hold some key information. In particular, investors will be looking for the BOC’s assessment of the impact of the Alberta wildfire upon the Canadian economy.
The more impactful of the week’s two rate decisions will come from the Bank of England (BoE). Markets are widely expecting the Monetary Policy Committee (MPC) to cut interest rates in order to help combat ‘Brexit’ fallout. Forecasts vary, with some suggesting the MPC may even slash the base rate to zero. There is also talk of quantitative easing being resumed and even of negative interest rates by the end of the year.