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Pound to Canadian Dollar Outlook: 3-Week Best as Jobs Data Undermines CAD

November 6, 2023 - Written by David Woodsmith


The Pound Canadian Dollar (GBP/CAD) exchange rate posted a 3-week high just above 1.6955 on Monday as overall risk appetite held firm.

GBP/CAD surged on Friday as a jump in the Pound was amplified by a weaker Canadian currency following the latest domestic jobs data and extended gains on Monday.

Both currencies gained support from the strengthening in risk appetite following benign US jobs data with the Pound a net beneficiary given its stronger correlation with US equities.

The global risk appetite will be important for the Canadian currency and Pound.

CIBC considers that the Canadian currency outlook is mixed.

According to CIBC; “A more constructive (through perhaps still fragile) risk environment is a tick in the positive column for the CAD but the list of fundamental CAD-positives is short on the face of it.”

GBP/CAD jumped to highs near 1.6945 on Friday before a limited correction.

The latest Canadian labour-market data was weaker than expected and reinforced reservations surrounding the economy.

There was a net increase in employment of 17,500 for October compared with consensus forecasts of over 20,000.

The breakdown of the data was also unfavourable with a net monthly decline in full-time jobs.

Employment in the goods producing sector grew by a net 7,500 jobs, largely in construction. The services sector was up by a net 10,000 positions, mostly in information, culture and recreation, as well as health care and social assistance.

The unemployment rate increased to 5.7% from 5.5% and above market expectations of 5.6%.

According to CIBC; “These trends should help ease wage growth and wider inflationary pressures ahead, meaning no need for further interest rate hikes and creating room for the Bank of Canada to start reducing rates in Q2 next year.”

The annual increase in wages also slowed to 5.0% from 5.3% and below expectations of 5.2%.

Deloitte Canada chief economist Dawn Desjardins noted the importance of wages data for the central bank.

According to Desjardins; “These wages numbers are not where they want them to be, but directionally, it does suit the Bank of Canada very well in terms of indicating that the labour market — which has been robust — is finally showing. That will be sufficient for the Bank of Canada really to ease off on the break a little bit.”

The seasonally adjusted Canadian PMI index declined to 51.9 for October from 53.1 previously.

Commerzbank is doubtful that the Bank of Canada will increase interest rates again. According to the bank; “the labor market would have to surprise significantly to the upside and at the same time, the inflation figures due in three weeks' time would have to show that inflationary pressures have persisted.”

The latest Reuters survey on Canadian interest rates indicated that the Bank of Canada will start to cut interest rates from April 2024.

The survey also showed that rates are expected to drop to 4.00% in the fourth quarter of 2024, lower than current Bank of England expectations.

Markets will be monitoring comments from the Bank of Canada and Bank of England closely.

Market positioning will be significant with scope for both currencies to make gains.

Rabobank noted that CAD net shorts have increased for the fifth week in a row. This was driven by an increase in short positions.

According to CIBC there is scope for short covering; “The net short is close to recent extremes and not far off the peak CAD-bearishness seen in the spring (just prior to the snap higher in the CAD). CAD shorts are prone to a squeeze if the USD does continue to slide.”

Moves in US bond markets will also be a key driver for both currencies with trends in Wall Street also a key element.
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