by Jon Beddell
Foreign Currency Market Update – GBP / CAD Update
Sterling has had a bad week. The election uncertainty created high levels of volatility, and the final outcome does not appear to have give the markets much comfort. Much of the downside in the GBP/CAD rate can be attributed to CAD strength as gold continues to surge (7% higher so far in May) and equity markets rebound from a wobbly patch last week.
It was trade data that drove sterling to new 2010 lows yesterday. Data for March which showed the trade deficit widened to £7.5bn for march, up from £6.3bn in February. Meanwhile, Canada also suffered a reversal in its own trade balance in March. Their net surplus fell from $1.2bn to $254m as the sharp rise in the Canadian currency started to bite. A stronger currency makes exports more expensive to foreign buyers. On the whole the Canadian data was viewed as positive on the basis that the growth in both exports and imports supported the theory of a continued economic recovery.
Bank of England governor Meryn King gave a nod of approval to the new government’s pledge to cut public spending by £6bn this year. Delivering the quarterly inflation report King warned that the UK economy was still in danger, but that the planned cuts would be useful in showing the markets that government was taking action, preventing a possible run on the pound and selling of UK gilts. We saw what happened with Greek, Spanish and Portuguese debt over the last few weeks and the new administration will be doubly keen to avoid a similar fate for gilts. When investors feel that a government may not be able to meet debt repayments as they fall due, they demand a far higher interest rate for investing in new government bond issues. Paying a high rate compounds the debt problems and can force a default. So taking steps to improve the market’s perception of how we are tackling our debt mountain is almost as important as reducing the deficit. The BoE believe inflation – which is currently well above the bank’s 2% target – will moderate back towards 2% over the next two years. That gives policy makers the flexibility to keep interest rates low for the short term.
The technical outlook for sterling is negative. Having now broken to new record lows, there are no historical price levels to point towards as possible support. That means sterling will remain vulnerable, and we cannot speculate on when or from what level it will eventually turn.
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