Despite Sterling weakness, the Pound to Canadian Dollar exchange rate has recovered from its weekly lows on Wednesday as the latest US political news puts investors off risk-correlated currencies like the ‘Loonie’.
Early week trade saw GBP/CAD fall from opening levels of 1.7668 to a May low of 1.7534 on Tuesday. The pair clawed back to trend near the week’s opening levels on Wednesday.
This week’s UK data has seen some better-than-expected results but have disappointed markets where it counts.
Following last week’s highly dovish Bank of England (BoE) meeting, news that UK inflation had been higher than expected at 2.7% year-on-year in April simply didn’t impress.
The bank had made clear last week that it is confident in leaving UK monetary policy at its loosest levels on record even if inflation nears 3%. As a result, the Pound remained weak after the Consumer Price Index (CPI) report came in.
Wednesday’s data was similar. According to Britain’s March employment report, unemployment dropped to 4.6% – its lowest and best level in over 40 years. The number of people in employment hit a record-high.
However, investors were more interested in Britain’s March wage growth report which confirmed that wages excluding bonus had slowed to 2.1% – worse than the predicted 2.2%.
This increased market concerns that as inflation rises and wage growth falls, consumers will have an increasingly difficult time living comfortably within their means. For a consumer-facing economy like Britain’s, analysts suggest this means economic growth will slow in the coming year.
Despite this gloomy aspect to the Pound outlook, it was still favoured over the Canadian Dollar on Wednesday due to an increase of risk-aversion in markets.
The ‘Loonie’ had benefitted earlier in the week from a brief resurgence in risk-sentiment. Oil prices and the oil-correlated Canadian Dollar were bolstered by news that Saudi Arabian and Russian oil producers supported the idea of extending oil output cuts for an additional nine months.
However the risk-rally wasn’t to last, as Tuesday saw US political stability worsen.
US President Donald Trump has become embroiled in scandals. He admitted to sharing classified intelligence information with Russia’s foreign minister and ambassador in a recent meeting with them – though argued that he was within his right as President to do so.
Then on Tuesday evening a report emerged that Trump had asked ex-FBI Director James Comey to back down on the FBI’s inquiry into Michael Flynn, who was under investigation for misleading the White House on the subject of contact with Russian diplomats.
These factors have added up to weigh on market confidence in Trump as well as market appetite for risk. Uncertainty about the Trump administration has risen and some even speculate on bets of impeaching Trump.
However, GBP/CAD remains close to the week’s opening levels and could still see a poor performance this week if Thursday’s UK data disappoints.
Thursday will see the publication of Britain’s April retail sales results, which are expected to have improved from March due to Easter.
If retail sales fall below expectations, concerns about Britain’s economic activity in 2017 will worsen further and the Pound to Canadian Dollar exchange rate could fall towards the end of the week.
GBP/CAD could also be influenced by Friday’s highly anticipated Canadian inflation results from April. If Canadian inflation is higher than expected it will bolster market hopes that the Bank of Canada (BOC) could become more hawkish in the foreseeable future.
Frontpage December 31, 2019