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GBP/CAD Climbs as BoE’s McCafferty Signals Change to QE

July 13, 2017 - Written by James Fuller

The British Pound is rising sharply against the Canadian Dollar today on the back of hawkish signs from Bank of England (BoE) monetary policymaker Ian McCafferty.

GBP/CAD has now risen 0.4% to 1.6500.

McCafferty has caused a stir today after suggesting that the quantitative easing programme could be ended earlier than originally planned.

The Bank of England currently intends to continue maintaining its £435 billion stock of primarily government assets until interest rates are nearer 2% - seven interest rate hikes away at the traditional 0.25% pace.

However, McCafferty suggested that the Monetary Policy Committee (MPC) should think about an early exit, noting that other banks are already pondering this.

The Federal Reserve is within months of beginning to trim its US$4.5 trillion balance sheet and there is persistent speculation that the European Central Bank (ECB) will soon begin discussing the tapering of its quantitative easing scheme.

McCafferty also as-good-as-confirmed that he will again vote for an increase in borrowing costs during the August policy meeting, stating ‘as of today, I would not be changing my position’.

It should be noted, however, that McCafferty was one of the policymakers to vote against quantitative easing in the first place following the Brexit referendum, so his stance isn’t necessarily indicative of a shift in position from the MPC.

Office for Budget Responsibility Warning Fails to Undermine Demand for Pound Sterling

The government’s financial watchdog, the Office for Budget Responsibility (OBR), has today released its latest financial risk report, which comes with some dire warnings.

While the OBR stated that all governments needed to prepare for ‘nasty fiscal surprises’, it also noted that having to deal with the uncertainties posed by Brexit meant the UK government was particularly vulnerable to being taken unawares.

Additionally, the UK economy has failed the latest stress test run by the OBR, which simulated the effects of a deep recession, Sterling crisis and tumbling stock market.

The watchdog found that the deficit would climb to 8.1% of GDP by 2021-22 - the equivalent of an extra -£158.5 billion - and national debt would rise 29% to 114%.

Investors have remained focussed on the hawkishness of Ian McCafferty today, however, driving the Pound higher despite the dire warning.

Profit-Taking Following BOC Interest Rate Hike Causes CAD to Slump

The Canadian Dollar is falling today as investors take profit on yesterday’s sharp appreciation following an interest rate hike from the Bank of Canada (BOC).

Inflation has been weak, but the BOC dismissed this as temporary, while analysts suggested that the overheating housing market was a primary driver for the move to reign in lending.

Not everyone agrees that price growth will pick up, however, with a research note from Bank of America Merrill Lynch analysts stating;

‘The BOC expects excess capacity to be absorbed with inflation returning to 2 percent in 2018. We have a different view on inflation, which we see below 2 percent even in 2018.’

Today’s latest Canadian new housing price index have highlighted just why the BOC was compelled to act, after showing dwelling prices grew much faster than expected.

Although growth slowed, the fall was much less than economists had expected; 0.7% month-on-month instead of 0.3% and 3.8% year-on-year instead of 3.5%.

The CAD/GBP exchange rate hit a seventeen-week high yesterday of 0.6109 following the rate hike, so investors have since rushed to sell the Canadian, pushing it -0.9% lower than the recent high.

Does Empty Data Calendar Mean Quiet End to Week for GBP and CAD?

Neither the UK nor Canada will release any economic data tomorrow, which could see the GBP/CAD exchange rate influenced by outside events.

The volatility from this week’s changes to the UK and Canadian interest rate outlooks will likely continue to buffet the currency pairing; the Pound could be pushed lower as the Canadian Dollar corrects higher following the sell-off.

But high-profile US data could create headwinds for CAD, helping GBP hold on to today’s gains.

As well as a speech from the Fed’s Robert Kaplan, the US economic calendar also contains the June consumer price index, advance retail sales figures and the July University of Michigan consumer confidence index.
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