Although Canadian retail sales picked up markedly in October this was not enough to shore up the ‘Loonie’ last week. This positive showing was eclipsed by a disappointing Consumer Price Index report, which indicated that inflationary pressure within the domestic economy had weakened. While forecasts had pointed towards a slight dip from 1.5% to 1.4% investors were surprised to find that the figure had in fact fallen to 1.2%, moving further away from the Bank of Canada’s (BOC) 2% target range.
This helped to ease the weakness of the GBP CAD exchange rate, which had been weighed down by discouraging UK public sector net borrowing data. With signs pointing towards a widening of the trade deficit and increased uncertainty among businesses, the appeal of the Pound was generally limited.
Speculation that the UK could lose its current level of privileged access to the single market also dented confidence in Sterling, as investors still lack any clarity as to the government’s negotiating position.
The Canadian Dollar came under fresh pressure after October’s Gross Domestic Product figures also fell short of forecast, dipping from 1.9% to 1.5% on the year. Weaker economic activity did not encourage confidence in the ‘Loonie’, raising the prospect of the BOC returning to an easing bias in the coming year. The prospect of further monetary loosening prompted a renewed sell off of the higher-yielding currency, especially given the persistent bullishness of the US Dollar.
Bullish Oil Prices Boosted Canadian Dollar
Risk appetite generally picked up once investors returned to their desks after Christmas, with lower trading volumes helping to push the Canadian Dollar higher against many of its rivals. Brent crude climbed towards a fresh yearly high, meanwhile, as hopes of a reduced global surplus pushed the commodity back above the US$57 per barrel mark. While doubts remain as to OPEC’s willingness to cut production in line with its pledge, the more optimistic market mood encouraged this bullish trend to continue.
Confidence in the outlook of the UK economy weakened once again in response to an unexpected decline in BBA mortgage approvals, the figure falling from 40,835 to 40,659. This suggested that lenders and consumers were more cautious, seeming to indicate a greater negative impact from the uncertainty following the Brexit vote. A weaker housing market does not bode well for the wider economy, encouraging investors to sell out of the Pound on Wednesday.
GBP CAD Exchange Rate Could Benefit from Steady UK PMIs
While it will be a relatively quiet start to the year in terms of Canadian data, the GBP CAD exchange rate is expected to see some volatility in response to the latest raft of UK PMIs. Any signs of slowing activity are likely to dent Sterling, exacerbating concerns over the strength of the economy ahead of Brexit negotiations. On the other hand, if the service sector in particular remains resilient then the Pound could see a fresh rally across the board.
Friday’s Canadian labour market data could offer some support to the Canadian Dollar, though, with the participation rate forecast to have picked up in December. A stronger labour market would encourage greater confidence in the outlook of the domestic economy, despite the weaker inflation and growth data. Any shortfall here, however, could see the GBP CAD exchange rate returning to a strong uptrend.