While risk appetite was elevated at the start of the year, the GBP CAD exchange rate was able to regain some ground on the back of the latest UK PMIs. All three measures bettered expectations to show solid economic growth, with the Services PMI posting a particularly positive result. The Pound trended higher as concerns over the negative impact of the Brexit vote on the domestic economy eased, even though signs of rising inflation offered some cause for caution.
Hopes had not been particularly high for December’s raft of Canadian labour market data, which was expected to show an increase in the unemployment rate. Although the figure did ultimately rise this was due to an uptick in the participation rate rather than a decline in employment levels, indicating that a greater proportion of the population was active in the jobs market. This encouraged confidence in the outlook of the economy, reducing the likelihood of the Bank of Canada (BOC) returning to an easing bias in the near future and boosting the ‘Loonie’.
Demand for the Pound slumped sharply at the start of the week thanks to comments from Prime Minister Theresa May which seemed to indicate that the UK is on course for a hard exit from the EU. Noting that the government is not seeking to retain ‘bits’ of EU membership after Brexit, May encouraged a fresh round of Sterling selling. Investors were not impressed by the implication that the UK could lose its current level of access to the single market, even though the Prime Minister later reiterated that nothing had been ruled out.
Oil prices began to fall back somewhat, however, after Iraq revealed that it had made record crude exports in December. This undermined the general confidence that had followed the Organisation of the Petroleum Exporting Countries (OPEC) agreement to reduce its collective output, particularly as the US rig count also showed an increase. Altogether this undermined the view that the global oversupply glut is coming to an end, with US production looking set to fill the gap left by OPEC. As Brent crude slipped under the US$55 per barrel mark the Canadian Dollar was pulled down, although the GBP CAD exchange rate remained on a downtrend nonetheless.
While Brexit-based speculation is expected to keep the Pound on a weaker footing for the foreseeable future, it could still find some measure of support on the back of Wednesday’s production figures. With forecasts pointing towards a modest rebound in output in November, this could encourage renewed confidence in the robustness of the domestic economy. Even so, as the latest visible trade balance is expected to show a widening of the deficit, the outlook for Sterling is likely to remain bearish.
At the same time, signs of continued strength from the Canadian housing sector could see the Canadian Dollar extending its recent gains further. A positive showing from the new housing price index and existing home sales figures may offset the pressure of weakened oil prices in the near term. However, the ‘Loonie’ will remain vulnerable to any negative developments in general market sentiment, particularly if US data continues to raise the odds of a more imminent interest rate hike from the Fed.
|Data Item||Market Expectation|
|11th January 09:30 UK Visible Trade Balance (NOV)||-11.1 billion|
|11th January 09:30 UK Industrial Production (YoY) (NOV)||0.60%|
|11th January 09:30 UK Manufacturing Production (YoY) (NOV)||0.60%|
|12th January 13:30 CA New Housing Price Index (YoY) (NOV)||3.00%|
|13th January 14:00 CA Existing Home Sales (MoM) (DEC)|
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