A weak outlook for UK interest rates and a strong policy of higher US borrowing costs caused the Pound Canadian Dollar (GBP CAD) exchange rate to slump from 1.7521 to 1.7139 over the past seven days.
Pound Weakens after Bank of England (BoE) Signals that Future Rate Cuts are Likely
Last week the Bank of England (BoE) left interest rates on hold while signalling that further policy easing was likely. While markets had been expecting this, the adverse reaction from the Pound revealed that investors had secretly been hoping for an improved outlook. The BoE was not convinced by the recent strong performance of purchasing managers indices (PMIs) for August, even though it did revise its growth forecasts higher as a result.
According to the meeting minutes;
‘If the outlook … was judged to be broadly consistent with the August inflation report, a majority of members expected to support a further cut in bank rate … during the course of the year.’
However, strong UK house price data muted the effect of falling business confidence to keep the Pound on the rise yesterday. Markets had feared a post-Brexit hit to the property market, as was warned about by experts, but the Rightmove data held little to alarm investors. Monthly prices returned to growth, posting expansion of 0.7% after August’s -1.2% decline. On the year prices weakened just -0.1%, taking the rate of growth down to a still strong 4%. Consequently, the fact that business confidence hit a four-year low in the wake of the referendum was largely overlooked.
Oil Prices Tumble; Pound Weakness and OPEC Hopes Keep Canadian Dollar Advancing
Oil has been very volatile over the past few weeks. West Texas Intermediate tumbled significantly at the beginning of September, only to spike back to near August’s highs of US$47.62. Since then, ‘black gold’ has been on the decline again, falling back to the month’s opening levels of just above US$43 per barrel. This has been a significant dragging factor on the Canadian Dollar, although Pound Sterling weakness has kept the ‘Loonie’ dominant.
Fresh rumours from the Organization for the Petroleum Exporting Countries (OPEC) have played on the markets. Most recently boosting the markets were comments from Venezuelan President Nicolas Maduro concerning a recent meeting with Iranian President Hassan Rouhani. Maduro reported that;
‘We had a long bilateral meeting with Rouhani. We’re close to a deal between OPEC producer countries and non-OPEC.’
Iran is one of the OPEC nations most resistant to the idea of a production freeze or reduction, having only recently had export sanctions lifted. Traders were taking this with a pinch of salt, however, after previously having their hopes of action to boost oil prices dashed on multiple occasions.
CAD Fluctuates as Market Bets of US Monetary Tightening Vacillate
The Canadian Dollar has also been affected by the speculation surrounding the US Federal Reserve. The Fed will announce its latest monetary policy decision tomorrow, but markets have been trying to guess what will happen in December’s meeting. The path of US interest rates will have an impact on the Canadian economy due to the large amount of cross-border trade between the two North American neighbours.
According to the Office of the United States Trade Representative;
‘Canada is currently our 2nd largest goods trading partner with US$575 billion in total (two way) goods trade during 2015. Goods exports totalled $280 billion; goods imports totalled US$295 billion. The US goods trade deficit with Canada was $15 billion in 2015.’
Rising interest rates will strengthen the US Dollar against the Canadian Dollar. This makes exporting to the US less lucrative (fewer US Dollars can buy the same amount of Canadian goods as before) and makes importing more expensive (more Canadian Dollars are need to buy the same amount of US goods) for Canadian businesses.
US Fed Rate Decision Forecast to be Biggest Mover of GBP CAD Exchange Rates
Tomorrow’s Federal Reserve interest rate decision could see the ‘Loonie’ slump if the Federal Open Market Committee (FOMC) signals tighter policy in December. No indication of planned hikes would weaken the US Dollar, boosting oils prices and therefore driving the Canadian Dollar higher.
Wednesday sees the release of UK government borrowing figures for August. Public sector net borrowing posted a surplus of £1.5 billion in July, but forecasts for the latest measures predict a deficit of -£10.4 billion. If the market consensus is met, the Pound is likely in for a severe decline.
Thursday is a light day for the UK, but the usually low-impact CBI trends reports could be given more credence than usual. Markets reacted strongly to the last iteration of the data due to investor desperation for any and all post-Brexit data.
The rest of the week is sparse in terms of Canadian data until Friday, when consumer price figures are set for release. The core CPI is expected to weaken from 2.1% to 2%, while non-core inflation is predicted to rise from 1.3% to 1.4%. As the non-core index is the more stable measure of inflationary pressures, investors could overlook the weakening in the core index if the figures all print as forecast.