Surprise GDP Contraction Prompts CAD Exchange Rate Slump

Investors were not impressed to find that Canadian economic growth had unexpectedly dipped in August, leading CAD exchange rates into a fresh slump.

The economy contracted -0.1% on the month thanks to a weaker-than-expected performance from the manufacturing sector, following on from a flat reading in July.

Altogether this suggests that Canada’s third quarter gross domestic product is likely to be more sluggish in nature, a disappointment following the strong growth seen in the first half of the year.

This is expected to give the Bank of Canada (BOC) further encouragement to leave interest rates on hold for the foreseeable future, putting significant pressure on the Canadian Dollar.

With market risk appetite already limited by disappointing Chinese growth data, there was little to prevent the GBP CAD exchange rate making solid gains on Tuesday, with the pairing rising to its highest level since late June.

Hopes of Brexit Progress Boost GBP CAD Exchange Rate

While the GfK consumer confidence index continued to weaken in October, this failed to particularly weigh on the Pound.

Confidence in Sterling instead picked up in the wake of comments from chief EU negotiator Michel Barnier, who suggested that he is ready to ‘speed up’ Brexit talks.

This raised hopes that the second phase of negotiations could still begin before the end of the year, encouraging the GBP CAD exchange rate to extend its gains further.

Even though the UK and EU still appear to be largely at odds over key issues, the prospect of some meaningful progress was enough to boost the mood of investors.

Could Bullish Pound Run Continue on BoE Rate Hike?

Some volatility could be in store for the GBP CAD exchange rate in the later week as markets brace for the Bank of England’s (BoE) November policy decision.

With high odds of an imminent interest rate hike already largely priced in, the upside potential of the Pound looks somewhat limited.

Unless policymakers signal a more hawkish outlook than expected, raising the prospect of further monetary tightening in the coming months, Sterling may struggle to find particular strength on the back of the meeting.

On the other hand, demand for the Pound could weaken markedly if the BoE fails to deliver an interest rate hike at this juncture.

As some members of the Monetary Policy Committee (MPC) have expressed concerns over the wisdom of raising interest rates so soon there’s a risk that the hawks may not win the day.

CAD Gains Expected on Positive Employment Data

The appeal of the Canadian Dollar could pick back up ahead of the weekend, however, if October’s raft of employment data proves positive.

Any fresh signs of tightening within the labour market would offer some cause for confidence in the underlying strength of the Canadian economy.

While even a bullish showing is unlikely to alter the outlook of the BOC (in the near term at least) this may still be enough to offer CAD exchange rates a rallying point.

As long as the global oil market remains on a bullish trend, meanwhile, the ‘Loonie’ is likely to retain some degree of support.

Laura Parsons

Laura has been working in the financial services sector since 2012 and provides currency news updates for a number of online and print publications. Over the years she has produced exchange rate analysis for publishers like French Property News, The Express, The Telegraph and Forbes.

Contact Laura Parsons