Canadian Dollar under Pressure from Trade Turmoil despite Oil Price Jump
Despite the price of oil shooting up to a four-year high over the past few days, the Pound (GBP) has racked up strong gains against the Canadian Dollar (CAD).
Today GBP/CAD is trading at a rate of CA$1.704, which is a 0.3% rise on the day and a high for the week but falls short of last week’s high of CA$1.713.
The Canadian Dollar’s relative weakness has come about as fears that NAFTA negotiations may not be going anywhere and could have reached a stalemate.
With the US having recently entered into a free trade agreement with Mexico, investors fear that Canada may be frozen out of any new North American trade arrangement, causing substantial downside pressure on CAD rates.
Surging Oil Prices Fail to Translate into an Increase in CAD Exchange Rates
With crude oil being Canada’s primary export, sudden rises in its price usually translate into higher Canadian Dollar (CAD) exchange rates. This has not occurred on this occasion.
Brent crude is currently trading at US$81.25, up from US$77.50 last week – a rise of almost 5%. The price has seen steady gains on supply restriction from both Venezuela and Iran, and shows no signs of going down in the near term.
Canada’s oil industry has faced problems recently, with concerns arising about the viability of its extraction in the face of constricted pipeline capacity and heavy discounting on sales to the US.
GBP/CAD Surges as Traders Hang on Brexit Secretary’s Optimistic Outlook
Last Friday saw Sterling suffer heavy losses across the board as EU leaders unanimously rejected UK Prime Minister Theresa May’s plans for an EU-UK trade deal after her country leaves the European political union next March.
This saw the Pound slump – losing over 2% against the Canadian Dollar – and causing Theresa May to hold a televised address from Downing Street in which she called for the EU to ‘respect’ Britain and said ‘no deal is better than a bad deal.’
Her words raised fears among Sterling investors that she was saying there would be no deal with the EU – which would be considered a disastrous result – causing the heavy Pound selloff.
On Monday, however, the Pound made back most of its losses when Brexit Secretary Dominic Raab reiterated that the UK was still committed to seeking an equitable deal with the EU and that such a deal was not far off.
This had the effect of placating traders and GBP/CAD has been rising ever since.
GBP/CAD Exchange Rate Outlook: Fed Rate Hike Could Further Weaken Canadian Dollar as Political News Likely to Drive Movement
Tomorrow sees the Federal Reserve meet for its latest interest rate decision. Markets have already priced in a rise of 25 basis points, meaning US interest rates would be set at 2.25%.
While this hike may be expected, confirmation of it is likely to see the Canadian Dollar pulled lower, which likely will have a knock-on effect for GBP/CAD rates.
The day after the Fed decision, Bank of Canada (BoC) Governor Stephen Poloz will give a speech, which will be closely listened to by the markets for hints of forthcoming policy. Any indication that the bank will be running a regime of tighter monetary policy will give CAD a boost against GBP.
Friday will see Canadian raw material and industrial product price data, as well July’s gross domestic product figures. Currently, month-on-month GDP is expected to show a rise of 0.2%, up from 0% the month before. But with the UK’s GDP figures coming out earlier in the day – currently they are expected to show a rise of 0.4% – it remains to be seen which currency will get the backing of currency traders, if expectations are met.
Other than that, GBP/CAD is likely to remain driven by political considerations this week, with any new developments over Brexit or NAFTA liable to influence GBP and CAD respectively.