Pound Canadian Dollar Exchange Rate Forecast: CAD Plunges Lower on Oil Volatility and BOC Dovishness

Update: Weaker Oil Prices Add to Canadian Dollar Downside

As markets continued to absorb the implications of Bank of Canada (BOC) Governor Stephen Poloz’s latest comments the Pound to Canadian Dollar (GBP/CAD) exchange rate continued to push higher.

A weakening in the oil market put additional downside pressure on the Canadian Dollar (CAD) on Tuesday afternoon.

Even though Libya reported a pause in loading at a key port thanks to strike action the price of Brent crude continued to trend lower, to the detriment of CAD exchange rates.

Surprisingly Dovish BoC Commentary Boosts Pound Canadian Dollar (GBP/CAD) Exchange Rate

Unexpectedly dovish commentary from Bank of Canada (BoC) Governor Stephen Poloz prompted the Pound to Canadian Dollar (GBP/CAD) exchange rate to rally sharply on Tuesday afternoon.

Investors were unsettled by the nature of Poloz’s words, which potentially pave the way for interest rates to remain on hold for longer.

As Poloz noted:

‘The bank has concluded there remains a degree of untapped supply potential in the economy. This is important, for it means that Canada may be able to have more economic growth, a larger economy, and therefore more income per person, without generating higher inflation.’

This suggests that the BoC may not be on course to raise interest rates again in the near future, something which has weighed heavily on the Canadian Dollar (CAD).

If the BoC leaves monetary policy on hold for the foreseeable future the upside potential of CAD exchange rates is likely to remain rather limited.

Pound Canadian Dollar Boosted Despite Mixed Nature of OBR Forecasts

The UK Spring Statement offered additional support to the GBP/CAD exchange rate, meanwhile, even in the absence of any fresh policy measures.

Markets reacted positively to the latest Office for Budget Responsibility (OBR) forecasts, which pointed towards marginally stronger growth in 2018 at 1.5% rather than 1.4%.

Although the overall nature of the OBR report was less than positive this failed to weigh on the Pound, at least in the short term.

As the longer-term growth outlook of the UK economy is not quite so rosy, with the OBR’s 2021 and 2022 forecasts downgraded, GBP exchange rates may soon return to a softer footing, especially if uncertainties over Brexit persist.

Canadian Dollar Forecast to Remain Under Pressure on Trade Concerns

Trade worries could continue to benefit the GBP/CAD in the coming days, even though Canada was exempted from steep US tariffs on steel and aluminium.

An increasingly protectionist US outlook does not bode well for the Canadian economy, considering the high level of exports that flow south over the border.

The exemption for Canada is also a conditional one, based on the successful renegotiation of NAFTA.

This leaves the Canadian Dollar vulnerable to fresh pressure if talks to renew the trade agreement hit further roadblocks.

Developments in the oil market are also forecast to generate volatility for CAD exchange rates, with OPEC looking increasingly at odds with itself over its long-running production-limiting agreement.

If the disagreement between Saudi Arabia and Iran over oil prices escalates this could weigh heavily on the commodity-correlated Canadian Dollar.

Brexit Speculation to Dominate GBP/CAD Exchange Rate Outlook

In the absence of any fresh UK data this week the GBP/CAD exchange rate may struggle to find any particular rallying points.

Speculation over Brexit is likely to dominate the outlook of the Pound in the near term, with markets bracing for the start of the next round of official negotiations.

As European Commission President Jean-Claude Juncker has warned Theresa May that she needs to turn her ‘broad suggestions’ into workable solutions the prospect of any imminent breakthrough looks slim.

Until markets see greater clarity over the likely future trade relationship between the UK and EU support for the GBP/CAD exchange rate is likely to be muted.

Hannah Wilson

Contact Hannah Wilson