Pound Sterling has recorded a series of dramatic declines against the Canadian Dollar over the past seven days. Speculation over Brexit and oil supply cuts have weakened the GBP/CAD exchange rate, causing it to slump from a recent high of 1.7231 to a low of 1.6778.
Hard Brexit Fears Push Sterling over the Edge as Brexit Timeline Announced
The Pound has remained unsettled over the past few days by the building possibility of a ‘hard’ Brexit. This would see the UK cutting ties with the single market altogether in order to focus on immigration. This is favoured by many hard-line Brexiters, who would prefer to have greater control over borders; multiple EU officials have made it clear that access to the single market cannot come without operating open borders for EU citizens.
Fears reached peak levels at the beginning of this week after markets reacted to the Conservative party conference, which took place over the weekend. Her first appearance at the conference as Prime Minister saw Theresa May announce her intention to trigger Article 50 of the Lisbon Treaty by March 2017 at the latest. In her speech, the Prime Minister stated;
‘I know some people ask about the ‘trade-off’ between controlling immigration and trading with Europe. But that is the wrong way of looking at things. We have voted to leave the European Union and become a fully independent, sovereign country. We will do what independent, sovereign countries do. We will decide for ourselves how we control immigration. And we will be free to pass our own laws.’
Markets continue to react dovishly to the news today, with even the unexpected above-forecast rises from yesterday’s UK manufacturing PMI and today’s construction PMI failing to improve Pound sentiment. GBP/CAD is at its second lowest level since the referendum, while elsewhere the Pound has hit a three-year low versus the Euro and collapsed to a 31-year low against the US Dollar.
Prospect of OPEC Production Cut Keeps Canadian Dollar on Uptrend
If speculation over Brexit was the main driving factor behind Pound Sterling movement recently, second-guessing oil cartels was what kept the Canadian Dollar in motion.
Oil received a significant boost in recent days after oil cartel OPEC informally agreed to cut production in order to alleviate the pressure upon the crude market. After a meeting on the side-lines at an energy conference in Algeria, the Organisation of the Petroleum Exporting Countries announced it would work to cut production by 700,000 barrels per day.
The news has caused a sustained oil rally, with WTI Crude leaping from US$44.67 to US$48.81 and Brent Crude rising from US$45.97 to US$50.89. Gains have eased slightly today thanks to news that Iran’s level of oil sales has returned to that of 2011, before output sanctions were imposed. The Canadian Dollar has also been strengthened by the latest OPEC developments, with CAD/GBP exchange rates climbing from 0.5807 before the deal announcement to today’s 0.5950, a 2.5% rise.
Gains have been choppy, however, with the markets still cautious of becoming too hopeful. As commentators have pointed out, what transpired from the informal meeting was essentially ‘an agreement to agree’ at the next official OPEC meeting in November. OPEC have disappointed markets before in terms of production freezes, with John Kilduff, founding partner at Again Capital, explaining;
‘OPEC’s track record on adhering to production cuts to quotas is ridiculously poor … if not nonexistent. You can’t believe they’re going to come through on this one either.’
GBP/CAD Exchange Rate Forecast; UK Services PMI Could Draw Focus from Brexit Angst
While fears over the UK’s exit from the European Union are likely to weigh even more heavily on the Pound in the coming weeks now that a timeline is in place, tomorrow’s services PMI may be the index that tears market focus away from worrying about the single market. With the manufacturing and construction indices having over performed and the recent unrelated index of services measure showing sector growth, there is a good chance the PMI will show increased sector growth, rather than the weakening from 52.9 to 52 as predicted.
While Canada is set to release the international merchandise trade figure for August and a narrowing of the deficit is predicted, markets may be too focussed on OPEC to make much of the data.
Friday promises to be a volatile day of trading for GBP/CAD. The UK is set to release house price data, industrial and manufacturing data and trade figures. Industrial production is expected to accelerate marginally on the month and slow noticeably on the year, while manufacturing production is forecast to improve. Trade deficits may edge lower. Also due out later in the session is the National Institute for Economic and Social Research (NIESR) GDP estimate.
Canada, meanwhile, will release September’s unemployment rate and net change in employment figures. Joblessness is expected to hold steady at 7%.