Pound-to-Canadian-Dollar Rate Dives Again as Brexit Woes Mount, Retail Sales Boost CA Economy

Image © Stockyme, Adobe Stock

- GBPCAD slide continues after CA retail numbers, amid Brexit woes.

- Retail sales offer CA economy hope of recovery from a Q1 soft patch.

- As Brexit news-flow threatens lower levels for Pound Sterling rates.

Pound Sterling succumbed further to the overtures of a resurgent Loonie Thursday after March retail sales figures cheered the Canadian economy and as a Brexit-related crisis continued to brew in Westminster, threatening new lows for the Pound-to-Canadian-Dollar rate.

Sterling's losses escalated late Wednesday after House of Commons leader Andrea Leadsome resigned from cabinet in protest over Prime Minister Theresa May's entreaty to the opposition Labour Party, heaping further pressure on the embattled leader. 

Leadsome says PM May's Tuesday pitch aimed at securing opposition votes for her EU withdrawal agreement puts deliver of the 2016 referendum result in further doubt, although her resignation is raising fears about the possible collapse of the government.

Meanwhile, the Loonie was lifted by Canadian retail sales data. Sales surged by 1.1% in March, up from 1% growth in February and when markets had looked for just a 0.8% increase, Statistics Canada data showed on Wednesday. 

Growth in core sales, which exclude cars because of the distorting impact their large ticket prices have on underlying trends, rose from 0.7% to 1.7% when consensus was for just a 0.8% increase.

"The 0.3% increase in real sales isn't far off from what we had penciled into the GDP tracking forecast, and should have monthly GDP still set to print a gain of between 0.3-0.4% for March," says Royce Mendes, an economist at CIBC Capital Markets.

Markets care about sales data because it provides insight into the likely pace of growth in a given period and momentum within an economy is an important determinant of the inflation pressures that dictate interest rate policies.

Changes in interest rates are normally only made in response to movements in inflation but impact currencies because of the push and pull influence they have over capital flows, and their allure for short-term speculators.

"The tick up in retail sale volumes in March follows earlier-reported bounce-backs in manufacturing sales and exports after likely weather-related drops in February. The data on balance is still consistent with GDP growth coming in at a sub-1% rate in Q1 but better reports later in the quarter also still leave the odds on a bounce-back to a 2% rate in Q2," says Nathan Janzen, an economist at RBC Capital Markets.

Above: Canadian Dollar strengthens against U.S. Dollar in May.

"Robust domestic data has helped extend the Citi economic surprise index (ESI) reading to above 80. That’s rare territory for the index and has helped the CAD maintain its momentum while other commodity currencies have come under pressure over the past two weeks. However, we’re a bit circumspect when it comes to endorsing further CAD strength tactically. In fact, we see signs that the correlation between a stronger CAD and the ESI should start to wane," says Bipan Rai, CIBC's head of FX strategy.

The Bank of Canada (BoC) about-turned in December on earlier guidance that had suggested it could lift its interest rate as many as three or four times in 2019. Its guidance now is that rates could go up or down in the next change.

This was after an escalation in the U.S.-China trade war was judged by the BoC to be threatening both the global and Canadian economies. That tariff fight has since stepped up a gear and is once again depressing sentiment among investors, and possibly at the BoC.

Wednesday's data provides hope to some observers that Canada's economy is now recovering from a soft patch that spanned the final months of 2018 and much of the first quarter this year, but it's far from certain whether this will be enough to change the Bank of Canada outlook.

However, and as it relates to the Pound-to-Canadian-Dollar rate, another u-turn from the central bank might not be necessary for the Loonie to advance further against its British rival because developments in the Brexit process are increasingly weighing on Sterling.

"GBP retains a weak undertone amid rising political tensions in the UK following PM May’s seemingly failed attempt to revive her Brexit plan," says Shaun Osborne, chief FX strategist at Scotiabank. "The outcome of yesterday’s rather shambolic events – which saw everyone May had hoped to win the support of reject her idea almost out of hand seems likely to accelerate her departure."

Above: Pound-to-Canadian-Dollar rate shown at daily intervals.

"The underlying trend lower remains powerfully bearish, however, so gains are very likely to be corrective in nature only. Trend signals are aligned bearishly across short, medium and longer term studies while weekly price signals have been hugely bearish through Mar-May, implying major tops/reversals in the 1.77/1.78 area. We rather think the loss of support around 1.73 rather implies mediumterm downside risks extend to the 1.68/1.69 area. Look to fade near-term gains," warns Eric Theoret, a technical analyst colleague of Osborne.

The Pound has been under the cosh this last week as calls for the resignation of Prime Minister Theresa May grow louder ahead of a fourth vote on her EU withdrawal proposals scheduled for the week of June 03.

The catalyst for this week's sell-off was the PM's decision to offer opposition MPs an opportunity to force a further Brexit referendum and to dictate the terms of the future UK-EU customs relationship if they support a bill aimed at ratifying her EU withdrawal agreement.

The pitch to Jeremy Corbyn's opposition Labour Party has so-far gone down like a cup of cold sick on the Conservative Party backbenches and risks seeing the PM lose even more of her own MPs than she gains from the opposition on the fourth attempt at securing a majority for the withdrawal treaty.

Further losses are a risk because an eviction of PM May from 10 Downing Street risks handing Brexit supporters control over the Brexit process, as the Conservative Party membership strongly supported an EU exit in the referendum and have been up in arms this year over May's Brexit proposals.

"Pressure on UK Prime Minister Theresa May to step down has intensified. Leader of the House of Commons Andrea Leadsom resigned because she no longer believed the government’s approach will honour the 2016 Brexit referendum.  Heightened Brexit uncertainty will keep GBP under pressure," says Kim Mundy, a strategist at Commonwealth Bank of Australia. 

Above: Pound-to-Canadian-Dollar rate shown at weekly intervals.

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