Risk appetite was heightened by a better-than-expected Chinese Consumer Price Index, which indicated that the world’s second largest economy was continuing to recover from earlier slowdown concerns. As a result the Canadian Dollar was boosted, particularly with oil prices already shored up by positive speculation over a potential deal on limiting producer output. A number of major producers, including Russia and Saudi Arabia, have recently expressed a willingness to discuss the issue, raising hopes that a more substantial floor could be put back under crude prices.
Brexit-based worries have also continued to hamper the GBP CAD exchange rate, with markets spooked by rumours that Chancellor of the Exchequer Philip Hammond could be considering resignation. While this was strenuously denied by the Treasury, investors nevertheless remained concerned by reports of an increasing divide within the Cabinet. With Hammond’s argument for the UK to maintain its access to the single market clashing with the harder line of his Brexiteer colleagues, worries persist over the shape of the UK’s eventual relationship with the EU.
GBP CAD Exchange Rate Trended Higher Despite Rising UK Inflation
Investors were not encouraged to find that UK inflation had surprised to the upside in September, with CPI showing an uptick from 0.6% to 1.0% on the year. This was seen to be another sign of the negative impact that the Brexit vote has had on the domestic economy, with the sharp slump of the Pound starting to filter through and put pressure on prices. Inflation is now expected to overshoot the Bank of England’s (BoE) 2% target in the near future, something that is likely to outpace wage growth and increase the domestic cost of living. However, this suggested that the BoE will not be inclined to cut interest rates again in the near future, boosting the GBP CAD exchange rate (at least temporarily) on Tuesday.
Some of the steam began to fade from the oil price rally, meanwhile, with Brent crude failing to hold above the US$52 per barrel mark. This was largely due to increasing market scepticism over the possibility of oil producers reaching a meaningful agreement ahead of November’s OPEC meeting, with little other than sentiment supporting the commodity at this juncture. Should the week’s US crude oil inventories demonstrate a further increase in stockpiles then the Canadian Dollar may well return to a weaker footing as prices drop off once again.
No Change from Bank of Canada Expected to Boost CAD
Despite the Pound’s increasing divorce from domestic data, it still seems likely that sentiment will be moved by the latest UK employment and public sector net borrowing figures. If wage growth is shown to be stalling in the wake of the referendum then the prospect of strengthening inflation could weigh on Sterling more heavily, particularly given the BoE’s focus on wage stats. Greater downside pressure could also stem from signs of rising government borrowing, with the UK’s deficit already causing some concern for markets as GBP exchange rates weaken.
The Bank of Canada (BOC) is not expected to make any change in policy at its meeting on Thursday, although the tone of policymakers could see the ‘Loonie’ weaken. If the central bank maintains its neutral bias, however, the GBP CAD exchange rate could come under renewed pressure with the chances of further policy divergence from the more hawkish Federal Reserve reduced.
Confidence in the Canadian Dollar could also be boosted ahead of the weekend on the back of the latest Canadian CPI data. Forecasts point towards a solid uptick in domestic inflationary pressure from 1.1% to 1.4%, something which could encourage greater confidence in the robustness of the domestic economy.