Pound to Canadian Dollar Exchange Rate Forecast: GBP/CAD to Sink as NAFTA Fears Subside?

Despite some optimistic UK data and disappointing Canadian numbers on Thursday, the Pound to Canadian Dollar (GBP/CAD) exchange rate continued to trend relatively close to its weekly lows.

Since opening this week at the interbank level of 1.82, GBP/CAD has fluctuated between highs of 1.83 and lows of 1.81. During Thursday’s session, GBP/CAD’s interbank rate was in the region if 1.81.

The Canadian Dollar (CAD) has remained appealing to investors due to market optimism that the North American Free Trade Agreement (NAFTA) can be successfully renegotiated. NAFTA is the trade agreement shared between the US, Canada and Mexico.

Recent protectionist rhetoric from the US had caused concerns that it could pull out of the agreement or cause it to collapse, which would have an adverse effect on Canada’s economy and the Canadian Dollar.

In the past week though, optimism from US and Canadian negotiators has boosted market hopes that renegotiations will succeed.

While Canadian officials have said much work is left to be done, the optimism of US officials has reassured investors that it is unlikely to pull out of talks. According to Canadian Finance Minister Bill Morneau:

‘NAFTA renegotiations are actually going well… we are trying to solve some challenges. We are quite optimistic that we will get there.’

Pound (GBP) Exchange Rates Little Changed by Thursday’s Data

Thursday saw the publication of the week’s most notable UK ecostats, but none of them had a sizeable impact on the Pound (GBP).

Britain’s final Q4 2017 Gross Domestic Product (GDP) results met projections in both major prints. The quarter-on-quarter figure slipped from 0.5% to 0.4% as expected, while the yearly print fell from 1.8% to 1.4%.

UK business investment did beat expectations in Q4, rising from 2.2% to 2.6% year-on-year. The previous figure was also revised higher.

Sterling remained pressured by an end-of-quarter selloff however, as well as underlying Brexit jitters.

Thursday marked the beginning of the second year of Brexit negotiations. With less than a year until the UK exits the EU on the 29th of March 2019, investors are becoming anxious that UK-EU trade discussions had yet to begin in full.

Canadian Dollar (CAD) Exchange Rates Limited as GDP Growth Disappoints

The Canadian Dollar could have seen an even stronger late-week performance against Sterling, but its gains were limited by market disappointment in Canada’s January Gross Domestic Product (GDP) results.

Canada’s January GDP stats were published on Thursday, revealing that growth had actually contracted by -0.1% at the beginning of the year, below expectations that growth would remain at 0.1%.

The data indicated to analysts that Canada’s economy is on track to have underperformed in Q1 2018.

According to Doug Porter from BMO Financial Group:

‘The underlying story is that growth remains on a sluggish underlying path of less than 2 percent … for the Bank of Canada, this reinforces the point that there is little urgency to hike rates again,’

As a result, Bank of Canada (BOC) interest rate hike bets slipped and the Canadian Dollar became less appealing, supported more by trade hopes than domestic news.

Pound to Canadian Dollar Forecast: Trade Developments to Continue Driving GBP/CAD

If developments on trade news involving the US and Canada develop in a way that relieves Canadian Dollar investors, the Pound to Canadian Dollar (GBP/CAD) exchange rate is likely to remain pressured despite underwhelming Canadian data.

The primary reason for Canadian Dollar weakness so far this year has been due to concerns that the North American Free Trade Agreement (NAFTA) could lose the US or collapse in some way.

As a result, if NAFTA concerns recede or the US continues to take a cooperative tone regarding global trade, the risky trade-correlated Canadian Dollar is likely to remain appealing to investors.

Sterling, on the other hand, is likely to be driven by developments regarding Brexit, particularly if there is any news on UK-EU trade negotiations.

Upcoming UK and Canadian data is also likely to have an effect on the Pound to Canadian Dollar exchange rate next week.

Britain’s March PMI results from Markit will be published throughout the week, and Canada’s March manufacturing PMI will come in on Monday.

More key Canadian stats will be published at the end of the week, including February trade balance results and March’s job market results.

Josh Ferry Woodard

After leaving university in 2011 Josh briefly worked as a currency analyst in the South West of Cornwall. Josh continued monitoring the currency markets and publishing exchange rate analysis after moving to London in 2012, with a particular focus on the impact of economic and political stimuli on forex. Josh was a regular contributor to The Telegraph’s weekly currency feature for several years.

Contact Josh Ferry Woodard