Confidence in the Canadian Dollar strengthened markedly in the wake of the Bank of Canada’s (BOC) May policy meeting. Although interest rates remained unchanged, the tone of policymakers proved to be a little more hawkish than anticipated. With the BOC showing signs of shifting away from its previous neutral policy bias the appeal of the ‘Loonie’ improved, even though the prospect of any rate hike remains distant at best. Provided that domestic data continues to demonstrate signs of improvement, though, the GBP CAD exchange rate could come under increased downside pressure.
After much speculation, the OPEC-led production limiting agreement was extended for another nine months. However, this deal proved to be less than markets had hoped for, prompting oil prices to weaken in the wake of the announcement. While rising US output suggests that the global oversupply glut is unlikely to ease for some time to come, it was not long before confidence in oil began to recover. This offered further support to the Canadian Dollar, allowing it to extend its gains against the Pound ahead of the weekend.
Election Jitters Dent Pound Demand
The GBP CAD exchange rate extended its slump on Friday, responding to the latest YouGov opinion poll. As the Conservative lead over Labour was indicated to have narrowed to just five points, the chances of a landslide victory seemed to recede. This encouraged investors to pile out of Sterling, as a larger Tory majority has become associated with the prospect of a smoother Brexit process. A disappointing downward revision to the first quarter UK gross domestic product also dented the appeal of the Pound, suggesting that the economy is in a weaker state than previously thought.
Even so, the Canadian Dollar failed to hold onto its gains in the wake of the bank holiday weekend as market risk appetite faded. With oil prices still under pressure in spite of the OPEC deal there was little reason to favour the ‘Loonie’, particularly as confidence in the abilities of the cartel faded further. OPEC’s ability to set the price of oil has weakened considerably, a worrying sign for markets as the oil price looks set to remain range-bound in the region of US$50 per barrel.
Stronger Canadian GDP Forecast to Boost CAD
However, demand for the Pound is likely to weaken in response to the latest raft of UK consumer data. Both the GfK consumer confidence survey and April’s mortgage approvals figure are expected to soften on the month, adding to the bearish outlook of the economy. Given the significant role than resilient consumer spending has played in bolstering economic activity in the aftermath of the EU referendum, any weakness here could signal a greater slowdown.
Expectations are rather higher for Canada’s GDP report, with the economy forecast to have grown 0.3% on the month in March. This could add to the more optimistic outlook of the BOC, raising the likelihood of the central bank pursuing a more hawkish monetary policy stance in coming months. A similarly strong showing is anticipated for the quarterly GDP data, potentially offering further incentive for investors to favour the Canadian Dollar over its rivals.
Concerns over the health of the UK economy could mount if May’s set of PMIs also prove weaker. Following the disappointing loss of momentum seen in the first quarter, any softness here would not bode well for the second quarter GDP figures. However, even if the manufacturing and construction sectors fail to show any increased growth on the month, a positive services PMI could boost demand for the Pound. Any upside surprise may set the GBP CAD exchange rate on a stronger uptrend.