GBP CAD Exchange Rate Falters as UK Borrowing Figures Put Pressure on Budget Announcement

November 21, 2017 - Written by Frank Davies

STORY LINK GBP CAD Exchange Rate Falters as UK Borrowing Figures Put Pressure on Budget Announcement

Some of the wind went out of the Pound Canadian Dollar exchange rate’s sails in the wake of a disappointing UK public sector net borrowing figure.

Markets were not impressed to find that the UK’s monthly deficit had risen to 8 billion in October, defying expectations of a slight improvement on the month.

This larger figure puts increased pressure on Chancellor of the Exchequer Philip Hammond ahead of his critical Budget announcement on Wednesday, further eroding his room for manoeuver.

As a result the GBP CAD exchange rate shed some of its recent gains, even though the mood towards the Canadian Dollar remained generally bearish on Tuesday morning.

GBP Exchange Rates Slump Ahead of UK Budget

The downside potential of the Pound was still somewhat limited, however, thanks to the latest developments in the ongoing Brexit saga.

Reports that Theresa May is prepared to increase her offer for the UK’s divorce bill encouraged market hopes that negotiations could still be on track to proceed to their second phase before the end of the year.

Naturally this prompted increased demand for Sterling, even though the political turmoil in Germany raises the risk of fresh disruption to the pace of talks going forward.

Even so, as Derek Halpenny, European Head of GMR at MUFG, commented:

‘We see increased upside risks for the Pound with clear signs of progress being made toward a financial settlement that prompts a formal shift to transition and trade talks beginning in January. We might get a better sense of that today with PM May meeting European Council President Donald Tusk at the EU summit in Sweden. What appears very clear is that financial settlement negotiations have moved on from whether more than EUR 20bn should be paid to what is an appropriate amount.’

So long as signs continue to point towards UK and EU officials reaching some form of agreement on the terms of exit in the near term GBP exchange rates should continue to benefit.

However, any renewed signs of division within May’s cabinet could provoke volatility for the Pound.

Wednesday’s Budget announcement could prove a fresh flashpoint for political tensions, given the division between Brexiteers and the more cautiously-minded Chancellor.

As the Office for Budget Responsibility is also expected to lower its growth forecasts this is likely to further undermine the appeal of Sterling.

With the UK economy already having lost significant momentum in 2017, as Brexit-based uncertainty and the ongoing wage squeeze bite, a downgrade here could dent the GBP CAD exchange rate.

Neutral BOC Outlook Limits CAD Exchange Rate Potential

A faltering in the recent bullish run of oil prices saw the Canadian Dollar trending lower, meanwhile, as investors remain concerned by rising US production.

With Brent crude struggling to make particular headway above the US$62 per barrel mark the upside potential of CAD exchange rates is distinctly muted.

Weaker market risk appetite has equally constrained demand for the higher-yielding Canadian Dollar, with markets still inclined to favour safe-haven assets for the time being.

CAD exchange rates seem unlikely to find particular support in the near term thanks to the highly limited odds of the Bank of Canada (BOC) returning to a monetary tightening bias any time soon.

As researchers at ING noted:

‘A fairly benign inflation backdrop - with the second-round effects of a strong CAD also feeding through - is likely to keep the BoC on hold for the foreseeable future. A rate hike is more likely now at the Apr-2018 meeting, though the fallout from a small dovish BoC re-pricing should be fairly limited for the CAD. Trade data (Tue) and retail sales figures (Thu) may offer further clarity here.’

Even so, if this afternoon’s wholesale trade sales data proves encouraging this could keep the GBP CAD exchange rate on a downtrend.

Any uptick in sales volumes could support a greater sense of confidence in the underlying health of the Canadian economy, giving policymakers some cause for optimism.

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TAGS: Pound Canadian Dollar Forecasts