Canadian dollar to sink further, Pound Sterling unable to extend gains in GBP/CAD

The CAD suffered both from weak Canadian economic data delivered on Friday; today we hear that the outlook remains challenging.

In early afternoon in London we see the Canadian dollar remains under pressure against the majority of currencies, but GBP/CAD is struggling somewhat:

The pound sterling to Canadian dollar exchange rate (GBP/CAD) is trading 0.1 pct lower than seen at Friday's close at 1.7944. The rise in the rate has taken a breather with an all-round weak GBP being the culprit behind current weakness. 

Meanwhile, the US dollar to Canadian dollar is 0.22 pct higher at 1.0919 and the euro to CAD is 0.21 pct higher at 1.4924.

(Please note our CAD quotes are taken from the spot markets; your bank will subtract a discretionary spread when passing on their retail rate. However, an independent FX provider will guarantee to undercut your bank's offer and deliver you up to 5% more currency. Please learn more here.)

The CAD underperformance comes on news that Canada’s Ivey PMI fell below 50 in Dec 2013 and the unemployment rate rose to 7.2%, the combination of negative news prompted the CAD to plunge ensuring the currency remains one of 2014's worst performers.

Concerning the Canadian dollar's outlook, we hear from Citigroup who say:

"Canada’s weak employment data prompted expectations that the economy may only grow 2.4% mildly, lower than the U.S. growth of 3.1%.

"Low inflation increases the economic downside risk. The BOC may not hike the rate until 2015 Q3, which may suppress the CAD.

"In addition, a retreat in oil prices may be CAD-negative. USD/CAD may gradually test higher to 1.236 (6.91), with short-term support at 1.0804 (7.18)." The pressure exerted on USD/CAD will ensure the other Canadian exchange rates will be biased to the downside.

Currency markets fear a change in direction in BoC policy

Why is the Canadian dollar stuttering? The answer lies in an increased belief that the Bank of Canada will soon change policy to stimulate a slowing economy.

We saw how such moves have hammered the likes of the GBP and USD in the post-financial crisis era, could this now be the turn of CAD?

Shaun Osborne at TD Securities explains:

"The CAD took another pounding in Friday poor domestic jobs data.  The weak number prompted a notable shift in the OIS curve, with markets moving to factor in the growing risk of a 25bps cut in the BoC overnight rate later this year (around 40% priced in for Q4) - a significant shift in thinking.  

"The jobs report had no redeeming features and there was no evidence that there were any anomalies with the data (weather etc.).  While the weaker than expected US non-farm payroll data will not deflect the Fed from its tapering path, weaker Canadian data clearly raise the risk of a meaningful change in BoC policy."

Regarding the CAD forecast, Osborne sees the USD/CAD heading higher still:

"We still think there is mileage in the long USDCAD trade and continue to target a move to the mid1.10 area."