Optimism surrounding the UK’s trade relationship with the EU after Brexit pushed GBP CAD away from a three-and-a-half year low to 1.65 last week.
Pound Posts Strong Recovery Following Theresa May Brexit Speech
The Pound made strong gains last week, rebounding from a sharp drop-off on the news Britain would leave the single market as part of Brexit. The news, revealed ahead of Tuesday’s highly-anticipated speech from Theresa May on the subject, caused GBP CAD to slump to a three-and-a-half-year low on Monday.
However, with the negative news out of the way, investors were free to focus on the positives of Theresa May’s speech on Tuesday. Notably, the Prime Minister commented that a free-trade agenda would be pursued, with Britain seeking some form of membership to the customs union. May stated that;
‘I want Britain to be able to negotiate its own trade agreements but I also want tariff-free trade with Europe, and cross-border trade there to be as frictionless as possible.
That means I do not want Britain to be part of the common commercial policy and I do not want us to be bound by the common external tariff.
These are the elements of the customs union that prevent us from striking our own comprehensive trade agreements with other countries. But I do want us to have a customs agreement with the EU.’
She also suggested that there may be protections sought for the UK’s dominant financial services sector and the automotive industry while stating that farm subsidies would be replaced by domestic funding.
As a result, the GBP CAD exchange rate surged to a near three-week high of 1.65.
Canadian Dollar Weakens on Fears of Bank of Canada Interest Rate Cut
The two largest drivers of Canadian Dollar depreciation last week were the outlooks of the oil market and Canadian monetary policy. The former undermined the ‘Loonie’ due to predictions that US oil producers may step up to fill the gap in output left by OPEC’s agreement to cut production, suggesting the currently high market prices may be set to tumble as the global oversupply continues, albeit originating from a different source.
Meanwhile, Bank of Canada (BOC) Governor Stephen Poloz shocked markets by revealing after the latest monetary policy meeting that an interest rate cut may be on the cards. Poloz noted that there were numerous downside risks to the Canadian economy. He told the press;
‘Should any of those downside risks materialize and put our inflation target at risk then we would have the room to manoeuvre. Yes, a rate cut remains on the table and it would remain on the table as long as those downside risks were still present.’
This allowed the GBP CAD exchange rate to advance further, with the pairing ending last week 5.1% higher than Monday’s lows.
Pound Canadian Dollar Exchange Rate Forecast; CAD Could Weaken as Trump Renegotiates NAFTA
The most influential event for the Pound is likely to be tomorrow’s Supreme Court ruling. The government appealed a verdict by the High Court that it must seek Parliamentary approval to invoke Article 50. Investors are confident the initial ruling will be upheld; if this is the case, the Pound is likely to advance further on hopes MPs can moderate Theresa May’s ‘Hard Brexit’ stance.
The Canadian economic calendar is virtually empty over the coming five days, but political developments could undermine the Canadian Dollar. New US President Donald Trump has already said that he intends to renegotiate the North America Free Trade Agreement (NAFTA) with Canada and Mexico and will withdraw from the deal if more favourable terms for the US cannot be secured.
Although not clear when, Trump has stated he wants to begin discussions with Canada soon, so there is the potential for more details to be revealed over the week, potentially undermining the Canadian Dollar.