GBP CAD Exchange Rate Slumps Sharply as US Banks Signal Brexit Concerns

November 8, 2017 - Written by Frank Davies

STORY LINK GBP CAD Exchange Rate Slumps Sharply as US Banks Signal Brexit Concerns

Confidence in the Pound diminished sharply in the wake of reports that the major US banks are moving closer to implementing their hard Brexit contingency plans.

With jobs looking set to be relocated from London back to the US and other European capitals this does not bode well for the UK outlook.

Unless the government can secure a transitional deal, or at least offer a greater degree of clarity, imminently then the Pound Canadian Dollar is likely to remain under pressure.

With Brexit-based uncertainty continuing to weigh on the UK economy investors are seeing little particular reason to favour Sterling at this juncture.

Canadian Dollar Exchange Rates Muted by BOC Dovishness

While the GBP CAD exchange rate slumped, however, the mood towards the Canadian Dollar was not overly positive on Wednesday morning.

Markets were not encouraged by the nature of Bank of Canada (BOC) Governor Stephen Poloz’s latest commentary, which remained generally dovish in nature.

All in all, the BOC looks set to maintain a more neutral policy outlook than investors had hoped in the coming months.

As analysts at Scotiabank noted:

‘Markets widely expected additional tightening steps to follow relatively quickly after the successive hikes seen in July and September.
‘But the BoC’s “dovish hold” decision in October effectively doused any thought of any more tightening occurring before Q1 next year.

‘Spreads, which had moved significantly in the CAD’s favour through Q3, narrowed again to undercut the CAD.

‘We have adjusted our own forecasts for the BoC and now look for rates to remain on hold until 2018 when we see only two 25bps increases now.’

Even so, the appeal of the ‘Loonie’ could strengthen this afternoon if the latest Canadian housing starts and building permits figures prove encouraging.

Any signs of renewed strength in the domestic housing market may bolster confidence in the health of the wider Canadian economy.

While even a strong showing here is unlikely to materially alter the current outlook of the BOC this could still put further downside pressure on the GBP CAD exchange rate.

UK Government Worries Limit Pound Sterling Appeal

The Pound may struggle to find a rallying point, meanwhile, as Brexit and domestic politics continue to dominate the minds of investors.

Theresa May’s minority Conservative government looks increasingly fragile thanks to the latest controversy surrounding both the International Development Secretary and the Foreign Secretary.

If the government’s position is seen to weaken further this could undermine GBP exchange rates, casting greater doubt over the prospect of any significant progress on Brexit coming any time soon.

Even so, with markets reassessing the outlook of the Bank of England (BoE), as the initial negative impact of last week’s meeting minutes subsides, the downside potential of the Pound may be somewhat limited.

Analysts at Scotiabank commented:

‘Negative real wage growth continues to hold back consumer spending growth, with precious little offset from other components of growth. In particular, the lingering uncertainty associated with Brexit is deterring a bounce in investment. Inflation is at or close to its peak at 3% y/y.

‘We believe that there are good reasons to expect a fairly brisk deceleration during 2018. In particular, the uplift to imported inflation during 2017 that resulted from the slump in the GBP exchange rate is becoming exhausted and should unwind next year. All in all, we expect CPI inflation back in line with the BoE’s 2% target a year from now.

‘The BoE is at the start of its interest rate normalisation process, though the market is not aiming high enough for rates next year in our view. We expect two further hikes in 2018, with the next arriving as soon as February if there is sufficiently upbeat news on wages.’

If the NIESR gross domestic product estimate for the three months to October proves encouraging this could see markets revising the odds of further BoE tightening.

Any indication that the economy has continued to regain some of its lost momentum could give the GBP CAD exchange rate a solid boost ahead of the weekend.

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TAGS: Pound Canadian Dollar Forecasts