Canadian Dollar Betters the Pound as Central Bank Shifts Gear
Despite making gains across the board, the British Pound has struggled against the Canadian Dollar which was boosted by a shift in tone at the Bank of Canada.
Pound Sterling was seen outperforming other major currencies on the back of a combination of stronger-than-forecast inflation data and oversold conditions being seen against many pairs.
However, the Canadian Dollar is also winning, with the Pound to Canadian Dollar exchange rate finding itself in something of a stalemate at 1.6880.
CAD found strength on the back of a speech given by the Senior Deputy Governor of the Bank of Canada (BOC), Carolyn A. Wilkins in which she sounded a confident assessment of the economy and talked about a potential “withdrawal or stimulus”.
Wilkins was more positive about the course of the economy over the next 6-months to 2-years, which is the medium-term time frame central banks focus most on in setting monetary policy.
The analysis strongly suggested the BOC might raise interest rates before the end of the year, from their current extremely low 0.5% level.
The recovery in capital investment in the oil and gas sector after the slump which accompanied the tumble in oil prices in 2015 was one major reason, but so was the widening out of the recovery into other sectors.
“What’s encouraging is that this growth is not being driven by just a few key industries,” Senior Deputy Governor Wilkins said.
The speech comes only days after particularly strong labour market data on Friday June 9 showed the economy added 55k jobs in May.
The Canadian Dollar rose by over 1.0% following Wilkin’s comments and these gains offset the rise in the Pound in GBP/CAD as a result of the leap in inflation on Tuesday morning.
The rise in CAD may not end yet, either, with more of a move still expected to unwind.
“The market still only prices a 50% chance of a rate hike by year-end, warning this move could continue,” said ING’s head of research Chris Turner.
The speech could also make CAD more sensitive to Wednesday’s Crude oil inventory data from the EIA.
“While oil could have another leg lower tomorrow if crude inventories do not decline & the IEA most likely projects large non-OPEC supply for 2018,” added Turner.
The Pound rose strongly, meanwhile, after headline inflation rose to 2.9% in May, almost reaching the 3.0% mark at which the Governor of the Bank of England (BOE) must write a letter of explanation of why it has been allowed to get that high to the Chancellor.
Slow growth and the fact that the weak pound has been the source of most of the inflation are the two main reasons why the BOE has not reacted to rising prices in the normal way, which would be via increasing interest rates, which are still at record lows of 0.25%.
BOE’s governor Carney is concerned about the negative impact of increasing interest rates which would put up most people’s mortgage repayments.
In a situation in which research shows people’s real earning’s dwindling due to the erosion from inflation, such a move would be in danger of causing widespread economic pain.
If anything, the uncertainty and potential slowdown to growth which Brexit might cause would be a reason to keep monetary policy loose and stimulating, not to raise rates as suggested by rising inflation.
“Inflationary pressures in the UK have become a serious headache for the Bank of England (BoE) over the past year. Although the political turmoil in the UK may meaningfully hurt the UK’s economy under the Brexit circumstances, the BoE’s hands are tied due to the rising inflation,” said Ipek Ozkardeskaya, Senior Market Analyst at LCG Capital.
The coincidental timeliness of the release – only two days before the conclusion of the BOE’s June rate meeting – means it could ‘revive policy hawks’ or those who, like Kirsten Forbes wished to increase interest rates.
However, the unprecedented political uncertainty caused by the inconclusive June election result and the breadth of unknown surrounding Brexit will probably encourage the BOE to take a neutral line.
“The solid inflation data revived the BoE-hawks before Thursday’s monetary policy meeting and could halt the pound’s decline temporarily. The 100-day moving average is expected to lend support to Cable at 1.2640. Still, the upside potential is seen limited due to political uncertainties following the unexpected outcome on Thursday’s general election. Decent GBPUSD-put options trail below 1.2870 at today’s expiry,” added LCG’s Ozkardeskaya.
