A larger-than-expected contraction in the Canadian economy during the second quarter has furthered gains for the GBP CAD exchange rate today.
Strong Banking Sector Profits Helps CAD Complicate GBP Advance
The GBP CAD exchange rate largely ignored an above-forecast weakening in UK mortgage applications during July last week. This was because the decline could be attributed to a natural correction after landlords flocked to purchase buy-to-let properties before new duty was brought into effect in April.
The week finally saw some positive news for the Canadian economy after several of its major banks posted strong profit growth for the second quarter. Canadian Imperial Bank of Commerce (CIBC), Bank of Montreal and Royal Bank of Canada (RBC) all beat analysts’ expectations. RBC also set aside less capital than in the first quarter to deal with bad loans. This suggested it was more confident the economy will remain strong enough to allow its debtors to make their repayments, resulting in fewer bad loans.
On Friday strong UK GDP figures failed to impress markets, despite showing no change in the initial estimates of 0.6% monthly and 2.2% quarterly growth. The fact that the figures were pre-Brexit referendum rendered them somewhat moot in the eyes of investors, although the Pound managed to recover nearly two days’ worth of losses against the Canadian Dollar by the close of the week’s trading.
Pound Recovering after Strong Consumer Confidence Figures
The UK consumer is quickly recovering from the initial shock of the EU referendum outcome, according to the latest survey from GfK. The confidence index had dropped to -12 in the wake of the vote, but August’s measure climbed to -7 instead of the recovery to -8 that had been expected by economists.
Also buoying sentiment are the latest house price figures, which have gone against economist forecasts to show accelerated growth. Data from Nationwide was predicted to show that price growth slid from 5.2% to 4.8%, but instead it accelerated to 5.6% on the year. Monthly prices were expected to contract -0.2%, yet they advanced from 0.5% to 0.6%.
However, Nationwide Chief Economist Robert Gardner has warned that the figures shouldn’t be taken at face value;
‘The pick up in price growth is somewhat at odds with signs that housing market activity has slowed in recent months. New buyer enquiries have softened as a result of the introduction of additional stamp duty on second homes in April and the uncertainty surrounding the EU referendum. However, the decline in demand appears to have been matched by weakness on the supply side of the market. This helps to explain why the pace of house price growth has remained broadly stable.’
Nevertheless, the Pound Canadian Dollar (GBP CAD) exchange rate is trending bullishly.
Canadian Dollar Weakened as Second Quarter GDP Figure Disappoints Forecasts
The Canadian Dollar has trended weakly today, initially declining due to expectations of poor GDP figures. The data did nothing to change the ‘Loonie’s path, showing a worse-than-expected contraction in the second quarter. GDP figures for June were stronger-than-forecast, accelerating to 0.6% on the month and 1.1% on the year, beating predictions of 0.4% and 1% respectively. But markets were more interested in the three months to June, which showed that growth turned negative, dropping to -1.6% instead of the forecast -1.5%.
According to Douglas Porter, Chief Economist with BMO;
‘We knew for the past four months that today’s GDP report was going to be ugly, and it delivered with a capital U. Looking beneath the headline drama, underlying growth continues to stumble along at little more than a one per cent [annual rate] pace, but we continue to expect that to improve in the coming year as the drop in energy investment ebbs.’
Pound Canadian Dollar (GBP CAD) Exchange Rate Forecast; Manufacturing PMIs on Tap
After the shock of the post-referendum crash in the UK PMIs, markets will be hoping to see a recovery in tomorrow’s manufacturing PMI. Predictions have indicated a rise from 48.2 to 49. Canada is also set to release a manufacturing PMI, which is forecast to weaken slightly from 51.9 to 51.5.
Looking further ahead, Friday promises another important UK PMI; the Markit/CIPS construction PMI, which is forecast to improve from 45.9 to 46.5, while the Canadian trade deficit is expected to improve. The key services PMI follows on Monday and there is an opportunity for the Pound to rack up strong gains against the Canadian Dollar here; Canadian markets will be closed for the Labour Day national holiday.
After Tuesday’s UK inflation report hearings, Wednesday offers further house price data and industrial and manufacturing production figures. The latest Bank of Canada (BOC) interest rate decision and accompanying statement are due later in the day.