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Canadian Dollar Outperforms the British Pound, Euro and US Dollar as "CAD Retains Strong Technical, Fundamental Undertone"

September 10, 2017 - Written by David Woodsmith

"The CAD has risen more than 11% against the USD. Too much, too quickly? Possibly; CAD may steady in the short run but there is no real sign of valuation stretch in the decline in USDCAD at this point. Our high-frequency fair value model suggests a fundamental equilibrium of 1.1920 or so for USDCAD currently, which largely reflects the yield/ spread story. If there is any bonce in the USD, we rather think gains will remain fairly limited." Scotiabank on September, 11.

Tuesday's currency FX markets see the Canadian dollar exchange rates in mixed trade against the majors.

The day's forex prices find GBP/CAD is quoted 0.11% higher at 1.59645, whereas the USD/CAD is just 0.06% lower at 1.44709 and the USD/CAD 0.18% lower at 1.20872.

Despite some strong Canadian employment stats on Friday, the British Pound to Canadian Dollar exchange rate recovered from its weekly lows. Sterling traders were encouraged by the day’s UK manufacturing production results which beat expectations.

The recent downtrend for the GBP/CAD exchange rate continued last week. While the pair briefly reached a high of 1.6198 on Wednesday, the pair hit its lowest level since January, 1.5844, on Friday morning before recovering slightly in the afternoon.

Pound (GBP) Recovers against Canadian Dollar (CAD) on Friday Data

The Pound plummeted against the Canadian Dollar last week in reaction to a surprisingly hawkish move from the Bank of Canada (BOC).

In its September policy decision, the BOC hiked Canadian interest rates from 0.75% to 1%. This surprising move marked the second rate hike from the BOC in the last three months.

While economists expected the BOC would hike Canadian interest rates again within the foreseeable future, most were surprised by how quickly this latest rate hike came.

The move came as a result of recently strong Canadian ecostats, such as a much stronger than expected Gross Domestic Product (GDP) report.

What’s more, the bank seemed to indicate that more hikes could be on the way before the current tightening cycle ends. According to Andrew Grantham from the Canadian Imperial Bank of Commerce;

‘It didn’t say that the current level of stimulus is now ‘appropriate,’ which has been a phrase used in the past and would have been a way of signaling a pause in hikes from here. It was a fairly hawkish move and statement today.’

The news caused GBP/CAD to briefly hit its worst levels since January.

The Canadian data saw support on Friday too, as August’s Canadian employment change results beat expectations at 22.2k. The key unemployment rate unexpectedly improved from 6.3% to 6.2%.

Despite strong Canadian data in recent sessions though, the Pound has recovered from its weekly lows against the ‘Loonie’, thanks largely to the UK data published on Friday.

July’s UK manufacturing production beat expectations, according to the report from the Office for National Statistics (ONS). Monthly production improved from 0% to 0.5%, while the yearly figure jumped from 0.6% to 1.9%.

On top of this, June’s trade deficit figure was revised higher and NIESR’s Q3 Gross Domestic Product (GDP) estimate came in at 0.4%.

This marked a notable improvement from 0.2%, the estimated growth figure for the three months into July.

Analysts from NIESR predict that industrial production and services sector activity helped to boost growth in the three months into August.

Pound (GBP) Forecast: UK Inflation Outlook in Focus

The Pound outlook could change notably in the coming week, depending on the results of Britain’s August Consumer Price Index (CPI) report and the following Bank of England (BoE) policy decision.

Britain’s August inflation report will come in on Tuesday. After inflation slowed to 2.6% in July, speculation that the bank could be pressured into tightening UK monetary policy faded.

If the upcoming inflation result is higher than expected, BoE tightening speculation could flare up again which could help the Pound to Canadian Dollar exchange rate to recover in the early week.

However, many analysts are doubtful that the BoE will be pressured by inflation any time soon.

Markets will highly anticipate the bank’s September policy decision on Thursday, but if the bank indicates that it still won’t be pressured by high inflation, Sterling could shed most of of the inflation-inspired gains it may have made.

Of course, poor inflation and a dovish BoE could cause GBP/CAD to fall back towards multi-month-lows.

Canadian Dollar (CAD) Forecast: Quieter Trade Ahead

While the Bank of Canada (BOC) indicated that it could hike Canadian interest rates again within the foreseeable future, there’s little notable Canadian data due for publication over the next seven days.

Housing data from August and July will be published on Monday and Thursday.

BOC news has kept Canadian Dollar investors occupied recently, but ‘Loonie’ trade could be affected by prices of oil, Canada’s most lucrative commodity, in the coming sessions.

Besides that, the ‘Loonie’ is likely to be influenced more by Pound movement and risk-sentiment.
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