Canadian GDP: Pound / Canadian Dollar Exchange Rate "Condemned" to Further Declines, 1.60 Eyed

A stronger than previously-expected rate of growth in Canada could mean the Bank of Canada brings forward the date for its next interest rate hike, leaving GBP/CAD facing further losses.

Stronger-than-expected Canadian growth could mean the Bank of Canada becomes a little less patient on rate hikes than had previously been the case, according to strategists, meaning more losses for the pound to Canadian dollar exchange rate.

The Canadian economy grew at a rate of 0.3% at the end of the second quarter, according to data released Thursday, faster than the consensus forecast for GDP growth of 0.1%.

June’s GDP number makes for a 4.5% annual pace of growth for the Canadian economy in the second quarter overall.

“Canada’s economy let the good times roll on in Q2, and today’s news dropped some hints that the party isn’t quieting down just yet,” says Avery Shenfeld, an economist at CIBC.

Now, some economists are looking again at their earlier projections for the pace of BoC rate hikes.

“The Bank of Canada hiked once on the view that the economy didn’t need interest rates as low as they have been to sustain growth, and could now use the same argument to follow up with a move in September, rather than, as the market expects, wait until October,” Shenfeld wrote on Thursday, August 31.

The BoC has been widely expected to raise its benchmark interest rate by 25 basis points in October, taking it to 1%, after raising it by an initial 25 basis points back in July.

The Pound to Canadian Dollar exchange rate fell by more than 1% Thursday, touching a session low of 1.6116 in the wake of the GDP announcement, taking the pair’s total losses in the last three months to more than 7%.

Canada’s central bank moves onto a hawkish footing at a time when Pound Sterling is facing multiple headwinds.

On the one hand the UK economy has shown signs of slowing and inflation has eased during recent months, which has all but destroyed the case for action from the BoE, while on the other hand the risks of a breakdown in Brexit negotiations have been increasing.

Strategists at Commonwealth Bank of Australia have recommended to clients that they sell the pound short against the Canadian dollar, targeting a further fall in the exchange rate, down to the 1.4900 level.

“GBP/CAD looks technically oversold as speculators have accumulated large net short GBP/CAD positions. But firm crude oil prices and Brexit-related political uncertainties will continue to weigh on GBP/CAD,” Elias Haddad, a strategist at Commonwealth Bank, wrote in a note.

Bank of Australia entered the trade at 1.6025, with a stop loss of 1.6400 and a price target set at 1.4900. But they aren’t the only strategists in the room who see further losses ahead for the currency pair.

“We have long maintained that the loss of GBP support in the 1.67 area condemned the cross to a retest of the 1.60/1.62 range—which last week’s low point effectively completes. However, there is scant sign that the GBP can recover at this point,” says Shaun Osborne, chief foreign exchange strategist at Scotiabank, in a note Thursday afternoon.

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