- Is the Canadian economy slowing?
- Trade conflicts and oil prices worry Bank of Canada
- Brexit uncertainly still weighs on Pound
Several times, the Pound has tried to claw back Brexit losses against the Canadian Dollar over the last month, but every time there is a fresh setback, it has been beaten back. GBP has varied between 1.724 and 1.676 in typical mid-market rates against CAD over the past month or so. The high came on 7th November over doubts about the strength of the Canadian economy while the low was on 10thDecember, following Prime Minister Theresa May’s announcement that she is delaying the Brexit vote in Parliament. The final outcome of Brexit will largely affect the fate of Sterling in December and beyond, while the performance of the Canadian Dollar will be linked to the price of oil and how the economy performs. With the Bank of Canada leaving interest rates on hold, the Canadian Dollar fell back close to 1.70 against the Pound, before the announcement and the delay of the parliamentary vote sent the Pound back down to around 1.685, before reaching around 1.68 at time of writing.
Is the Canadian economy slowing?
At the turn of the month, there were signs of a shaky Canadian economy haunting the Canadian Dollar. In Quarter 3, 2019, as the Bank of Canada has highlighted, the Canadian economy grew at 2% a year, 0.9% slower than the previous three months. Business investment and household spending both fell – and it is expected that growth will slow even further in the last three months of the year, due to lower oil prices and weak house sales.
Oil production cuts in Alberta are set to damage the national economy in 2019, it is feared. Alberta Premier Rachel Notley says there will be a cut of 325,000 barrels a day starting in the new year. The move is designed to offset large discounts on Alberta oil. Household spending slowed from 0.6% in Quarter 2 to 0.3% in Quarter 3, with spending on new home construction dropping 4.7%, the largest fall for more than nine years, while new vehicle spending fell 1.6%.
Trade conflicts and oil prices worry Bank of Canada
As expected, the Bank of Canada (BoC) kept its benchmark overnight interest rate at 1.75%, amid worries over international trade conflicts and cuts in oil prices and production in Alberta. The immediate reaction of the currency markets was for GBPCAD to rise to over 1.71 in typical mid-market rates. Against the US Canadian Dollar, the Canadian Dollar slipped below 0.75. The following day, news that the Canadian unemployment figures fell to 5.6% – a 40-year low, following the addition of 94,000 jobs, sent GBPCAD falling back to close to 1.69. However, the announcement of the postponement of the parliamentary Brexit vote to allow more negotiation, sent the Pound lower again, falling to around 1.676. BoC Governor, Stephen Poloz, says although the global economy is growing moderately, there are signs that the international trade conflict is hitting demand in many advanced economies, if not in the United States.
Oil prices have fallen sharply in the last three months, with crude oil values dropping from $76 a barrel to near $50. At time of writing, it is around $54. That said, an announcement that oil production in Alberta will be cut in the new year lifted the value of Western Canadian Western Select blend from a low of $14 a barrel to around $33. However, it is still significantly cheaper than US crude oil, which Canadian provincial leaders say is a “crisis” and economic competitiveness must be improved. The bank says, “In light of these developments and associated cutbacks in production, activity in Canada’s energy sector will likely be materially weaker than expected.”
The Canadian economy rose 2%, down 0.9% from the previous three months. This was in line with the bank’s projection, although data suggest growth may slow going into the fourth quarter. Business investment fell in the third quarter, in large part due to heightened trade uncertainty during the summer. However, business investment outside the oil sector is expected to strengthen with the signing of the United States, Mexico, Canada Agreement (USMCA) – or as Canadian Prime Minister, Justin Trudeau, calls it, CUSMA, which should see a continued growth in exports.
Inflation stood at 2.4% in October, but is expected to ease due to lower petrol/gasoline prices. The bank concludes, “Weighing all of these developments, Governing Council continues to judge that the policy interest rate will need to rise into a neutral range to achieve the inflation target. The appropriate pace of rate increases will depend on a number of factors. These include the effect of higher interest rates on consumption and housing, and global trade policy developments. The persistence of the oil price shock, the evolution of business investment, and the Bank’s assessment of the economy’s capacity will also factor importantly into our decisions about the future stance of monetary policy.” However, on Monday 10 December, the housing sector showed stronger than expected resilience, with housing starts rising 4.4% to 215,941, according to the Canada Mortgage and Housing Corporation. This was around 18,000 more than forecast by economists. In addition, Residential permits rose for the second month running. The 4.2% jump in October to $5.2 billion, was the biggest of the year. Commercial permits fell, bringing down the overall amount to $8.1 billion, a fall of 0.2%.
Brexit uncertainly still weighs on Pound
Uncertainty from the ongoing Brexit saga continues to drag the Pound down against the Canadian Dollar – not least after the postponement of the vital vote by MPs on Brexit. Prime Minister Theresa May told MPs the vote is set to take place sometime before the 21st January 2019 deadline, but she would not confirm when. At the moment, no deal is available without the Irish Backstop, she says. The UK is due to leave Europe on 29th March 2019, but at time of writing, there is still no agreement on how – or even if – that will happen. Although European chiefs have approved Mrs May’s exit plan, the proposal is not popular with UK MPs and was likely to be voted down in the Parliamentary vote, which is why it was delayed from Tuesday 11th December.
The 585-page withdrawal agreement covers citizens’ rights, the ‘divorce’ payment and the controversial ‘backstop’ for the Irish border, which seeks to retain an open border on Ireland in the event of a no-deal Brexit. In a fresh blow to the British government, it was found it in contempt of Parliament for not publishing full legal advice over Brexit, as had been previously agreed by MPs. It had published only a summary of the legal advice, arguing that the full advice was confidential. Subsequently, the government has published the advice in full, which discusses the possibility of being trapped in “protracted and repeated rounds of negotiations” over the Irish backstop. On top of that comes news that the UK could still decide to stay in the European Union.
The European Court of Justice (ECJ) has ruled that UK can cancel its withdrawal from the European Union without the consent of other member states. “The United Kingdom is free to revoke unilaterally the notification of its intention to withdraw from the EU,” the ECJ says. However, the ruling has to be ratified in Edinburgh, where it started, to be finalised on 20th December.
Meanwhile, disgruntled Conservative MPs have been calling for a vote of no confidence in Mrs May, which can be actioned when 48 letters are sent to the backbench body, the 1922 committee. But at time of writing, the rebels remain short of their target and Theresa May clings on to power. If the deal fails, it is anybody’s guess what happens next. MPs could agree to new Brexit amendments and with the support of the EU and the cabinet, bring back a revised deal to parliament. On the other hand, Britain could leave the European Union in March 2019 with no agreement. If more unhappy MPs write to the 1922 committee, Theresa May could face that no confidence vote and a leadership contest, or she could resign and call a general election.
Whatever decision prevails, the UK economy and Pound will be significantly affected. In Quarter 3, the UK GDP had its best showing for nearly two years, rising 0.6%. over the previous quarter and 1.5% up year-on-year. However, that could be the last piece of good news for some time. Most of the growth came in July, when England was enjoying a decent football World Cup run and warm weather boosted retail sales and the construction industry.
The National Institute of Economic and Social Research predicts the UK economy will grow just 0.4% in the last three months of the year. In the event of a soft Brexit, the UK economy could suffer even more, performing worse than any country in Europe with a meagre 1.1% growth in 2019 and 2020, according to European Commission forecasts. A no-deal Brexit is set to be even more damaging, however, with Bank of England Governor Mark Carney warning that in a worst case scenario, the UK economy could fall back by 8% after Britain leaves Europe, with the Pound dropping 25% and house prices down almost a third.
Guidance for CAD buyers
GBPCAD has been trading in such a defined range since early August. It is currently trading towards the bottom of the recent trading range and it would make sense to leave protection below the 1.6600 level, which has held since October 2017. If that breaks, then 1.6000 is definitely on the cards. Another failure could lead to a corrective rally back towards 1.7000.
Guidance for CAD Sellers
The bottom of the recent range should provide support at 1.6600. This level should hold initially and I would suggest targeting around those levels with a Market Order in the short term. A break would see a quick move lower, perhaps as low as 1.6000. For now, the rate is not yet oversold, as there is still plenty of room for the currency pair to trade lower. Only a break above 1.7000 would cause me to reassess.
Article supplied by Halo Financial, December 2018.
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