Published: July 10th, 2024
After an underwhelming Canadian jobs print raised the odds of an interest rate cut later this month, the technical outlook for GBP/CAD has improved sharply.
The pair rose 0.65 per cent on Monday and extended gains into Tuesday to reach 1.7496. Analysts say the technical signals are supportive and could spell more advances, even touching the 2024 YTD high of1 .76.
A note to investors from XTB said the Pound 'may be set to mount a larger recovery now that Britain’s political risk premium has dissipated. GBP has momentum on its side.’
XTB thinks any weakness is unlikely to pull the pair under the 50-day moving average currently at the technical level of 1.7350 that stopped a previous decline in June.
The Labour Party’s landslide victory in last week's UK national election should establish a period of political stability, with Prime Minister Kier Starmer saying Westminster wants to build closer ties to Europe post-Brexit.
Analysts at MUFG wrote in a market analysis this week that strengthening trade ties with Brussels could lift the Pound in coming months as the ‘Brexit premium’ that Sterling still enjoys is likely to fade.
‘Our forecasts for the Pound are based on expectations of more political stability ahead plus signals of a healthier rebound in economic growth than we believed earlier.’
Canada has no calendar events this week.
In March, one of Canada's largest banks predicted a bout of Canadian Dollar weakness in the coming months as the Ottawa central bankers faced up to the impact of a too-restrictive interest rate policy.
An analysis by National Bank of Canada (NBC) described positive performance by the Loonie in Q1 as ‘lukewarm’, especially when contrasted with other commodity currencies like the New Zealand and Australian Dollars.
NBC analysts called CAD ‘the weakest amongst the strong’, blaming low performance against other commodity currencies on underwhelming economic figures.
In a note to investors the bank parsed recent Canadian economic data and pulled out areas of weakness undermining Q4 GDP growth statistics, among them confirmation that Canadian domestic demand had fallen for the first time in 12 months.
NBC said the tepid fundamentals of the Canada’s economy could be blamed on Bank of Canada (BoC) interest rate policy, which at five per cent was ‘draining vitality and hindering growth’.
‘The downside of the BoC’s restrictive monetary policy is easier to see when you look at private domestic demand, which shrank for two consecutive quarters and has now dipped four times in six quarters.’
‘The bank has lost the justification for maintaining such a restrictive monetary approach.’
NBC also believed that Canada's most recent labor market print was overly optimistic, as the headline 41K expansion seen in February was inflated by public sector job postings. The bank noted that private-sector employment has sat more or less unchanged since June of last year.
According to NBC, all of this indicated that the Bank of Canada would be compelled to cut interest rates. On a year-to-year comparison, inflation had already fallen back to Ottawa’s 1-3 per cent target range, currently 2.9 per cent.
In April of 2023, the Loonie received a shot in the arm as oil prices rose by more than 8 per cent in the wake of a surprise production cut pledge by the OPEC+ group.
Markets were blindsided by an announcement from the crude cartel that saw members agree to slash nearly 1.7 million barrels of oil per day from May 2023 through to December. The Saudis agreed to the most extensive cuts, scaling back production by 500,000 barrels per day.
An analysis by Bloomberg said the move would give support to petro-currencies like CAD. While the cuts would tighten crude supply, the world economy would see a fresh inflationary jolt as a side effect.
Central banks were expected to act, meaning more rate increases than markets had priced-in before the OPEC+ bombshell. At the time (early April), USD/CAD was close to dipping below a bullish trend line after reaching some key support levels.
Alongside the Saudis, Russia extended a previously announced cut of 500,000 barrels per day through to year-end. Several other Gulf states also joined the group policy and announced their own cuts.
A production cut of nearly 1.7 million barrels of oil per day was significant, Bloomberg said, and would meet the cartel’s aim of keeping crude prices supported.
The USD/CAD rate was also impacted by improving risk appetite across financial markets. The US Federal Reserve had been signaling that rate increases might be paused, putting the Greenback on the back foot.
The core PCE Price Index, which is the Fed’s benchmark inflation gauge, came in weaker than expected on Friday 31st March. The OPEC+ announcement followed the next day and will likely compel Fed policymakers to re-think rate decisions.
Meanwhile this week could be a busy one for CAD bulls, with Canadian employment reports, private payrolls and ISM services PMI all due before week’s end.
As recently as December 2022, analysts were saying the return of declining crude oil prices would pull the Canadian Dollar down in 2023 and early 2024.
Analysts at Bank of Montreal (BMO) said a (then) recent dip in oil prices looked like a long-term trend, and was contributing to the Loonie’s decline. They also said, however, that an oil price recovery was expected the following year. That would give CAD added support.
‘The unexpected decline in oil prices over the past seven days has trickled through to forex markets in the ways we would expect,’ wrote BMO in a currency briefing at the time. For the Canadian Dollar, that was experiencing underperformance linked to oil market dynamics. ‘The surprising shift in crude prices is hammering commodity currencies like CAD.’