The past seven days has seen the Pound Canadian Dollar exchange rate shed around two cents, despite some solid UK data.
Thin Christmas Trading Leaves 2017 Outlook in Focus
Low market liquidity and a slower-than-usual pace of data releases meant traders were as occupied with the outlook for the year ahead as they were with more immediate ecostats.
Both the UK and Canada are facing significant headwinds in the coming months, but those surrounding Brexit are notably more concerning for investors. There are just three months left until the government intends to invoke Article 50 of the Lisbon Treaty, starting the UK down a path of which investors, politicians and the media seem to know little about. The resignation yesterday of one of the UK’s top EU ambassadors, Sir Ivan Rogers, further added to the underlying fear that Britain is headed for a ‘Hard Brexit’ devoid of single market access.
Meanwhile, the vitality of the crude oil markets continues to dominate Canadian Dollar trade. Although the global oversupply remains and crude is still under half the value of its 2014 peak at US$110 per barrel, the commodity is still trading around its highest levels in six months. Additionally, the Organisation of the Petroleum Exporting Countries (OPEC) finally agreed late last year to work together to cut oil production with a number of nations who are not cartel members.
Oil Market Strength Boosts Canadian Dollar, despite Pound Support from Markit PMIs
Markit’s December UK PMIs both pleasantly surprised investors after registering strong rises. The manufacturing index, expected to remain steady at 53.3, instead rose to 56.1 yesterday, while the previous month’s reading was upped to 53.6. Today’s construction PMI, which had been predicted to weaken slightly, climbed from 52.6 to 54.2.
However, news that a leading UK ambassador to the EU, Sir Ivan Rogers, had resigned from his post unsettled traders. Rogers, who had previously warned that a trade deal with the EU could take ten years to forge, was scheduled to leave towards the end of the year. His departure has raised concerns that the UK is more likely to end up with a ‘Hard Brexit’.
Meanwhile, the Canadian Dollar was boosted by a small rise in the RBC manufacturing PMI for December, which climbed to 51.8, while gains of 2.2% for WTI and Brent crude oil further improved sentiment towards the ‘Loonie’.
GBP CAD Exchange Rate Forecast; Key Data and UK Supreme Court Ruling Ahead
While investor sentiment has been buoyed by above-forecast performances from the recent UK manufacturing and construction PMIs, the most important reading is still to come. Tomorrow sees the release of the Markit services index, as well as the UK composite. Services is the most important sector of the UK economy and was the only one registering growth in the last round of GDP data. Therefore traders will become bearish if the services index shows the weakening forecast, rather than an upside surprise as provided by the other two PMIs.
The Pound is also set to be rocked by the incoming Supreme Court ruling on Article 50, after a four-day hearing in December in which the Government appealed a High Court judgement that Parliament should vote on the triggering of the exit clause. If the Supreme Court overturns the previous ruling, the odds of a ‘Hard Brexit’ will soar, likely causing a major Pound sell-off. Should the Supreme Court back the judgement of the High Court, the Pound is likely to rocket higher on the improved odds of a ‘Soft Brexit’.
On the data front for Canada, Friday could see strong losses for the Canadian Dollar thanks to the presence of unemployment data on the economic calendar. A predicted -5,000 drop in employment would take the joblessness rate for December up to 6.9% from 6.8%.