Canadian Dollar Looking Vulnerable to Further Pound Sterling Strength

GBP/CAD gains are largely symptomatic of Sterling's across-the-board outperformance with the currency enoying strong multi-week momentum.

The Pound has gained against its counterparts on Thursday after house prices in the UK rose solidly in January, leading to expectations of a brighter economic outlook.

Sterling has started February on a strong footing, rising by an average of a quarter of a percent against its peers on the morning of the first day of the month.

The fundamental catalyst behind the rally appears to be house price data from major estate agent Nationwide, which showed an unexpected surge of 3.2% in January compared the previous year.

This is quite a big step up from January of last year when house prices rose only 2.6% and it was also well above expectations of a slight slowdown to 2.5%.

Although house prices have been cooling over the long-term January's result represents a gear-like hike in prices.

The Nationwide data confirms an improving sentiment in the UK economy amidst the all-important consumer and comes a week after data revealed the economy grew a solid 0.5% in the final quarter of 2017.

The Nationwide data means the outlook for Sterling in February is quite good. Housing is a major influence on the economy and large rises or falls can be signs of turning points in the business cycle. There is an old market saying that 'housing leads the economy' which encapsulates the importance of the metric.

Most people's only real wealth resides in the value of their home. House price inflation is likely to drive up core inflation because if homeowners feel the value of their homes is rising they feel richer in general and so tend to spend more - or remortgage their homes to spend more.

Higher inflation recommends higher interest rates and these are a direct driver of the Pound because they attract more inflows from foreign investors, who tend to prefer parking their money somewhere where it is going to earn a lot of interest.

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Extending the Rally

From the perspective of the Pound-to-Canadian Dollar exchange rate, the data has extended the existing rally into the third day.

Looking at it overall, the Pound-to-Canadian Dollar has had an extremely strong start to 2018, rising from a trough low of 1.68 to a peak at the end of January of 1.76.

"A decent base may be in for the GBP now and that the cross is liable to renew its push higher from here towards the upper 1.75/low 1.76 area. Look for the cross to remain well-supported while 1.73 holds," says Shaun Osborne, an analyst with Scotiabank in Toronto.

The barnstorm higher has come about as a result of Canadian Dollar's weakness due to concerns about increasing US trade protectionism impacting negatively on Canadian exports.

The US has already imposed tariffs unilaterally on softwood lumber and dairy imports although its attempt to put a 292% punitive tariff on civilian jet airliners manufactured by Canada's aeronautical manufacturer Bombardier, was overturned by a US supreme court ruling that the tariffs were excessive last week. 

The Canadian domestic economy, meanwhile, is a more positive influence on its currency as it has seen positive growth recently.

At its last meeting in January, the Bank of Canada (BOC) was optimistic enough about the future to 'cool' the economy with an interest rate hike.

Part of the reason was recent data showing an exceptionally strong labour market.

Unfortunately, despite the interest rate rise CAD weakened as it was accompanied by solemn rhetoric from the governor of the BOC warning of the threat of trade protectionism from the US - by far Canada's largest trading neighbour. 

Thus, as far as a forecast goes for the pair, the main headwind for CAD is trade talks about NAFTA, and the currency's progress depends on how those unfold - for the Pound, the same can be said of Brexit; but overall the pair is in an uptrend, and 'the trend is your friend' as they say.

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