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Interest rates, oil prices and Brexit hit GBPCAD

Published: Monday 12 November 2018

  • ​​Interest rates 'need neutral stance'
  • Oil prices drop 20% in a month
  • Theresa May 'confident of Brexit deal'
Brexit optimism bolstered GBPCAD to a high of around 1.72400 in typical mid-market rates in both early October and November, while the UK budget “to end austerity” saw it drop to a low of 1.66681 at the end of October. In fact, since the budget trough, Sterling has climbed steadily, settling at around 1.72 at time of writing. With rumours of a Brexit deal nearing, GBP could climb even further in the next month, while any further delay will make the market more nervous of the uncertainties that a no-deal Brexit brings and weaken Sterling.
Interest rates ‘need neutral stance’

After increasing its overnight rate by 0.25% to 1.75% – its fifth hike since the summer and a decade high – the Canadian Dollar strengthened substantially against the Pound. Governor Stephen Poloz even signalled fresh rises, saying the rate would need a “neutral stance”, which is estimated at around 2.5%-3.5%. But a few days later, the Pound sunk even further against the Dollar due to downwardly-revised economic growth and increased spending being signalled in the UK Autumn budget.

Stephen Poloz says after 10 years of low rates, the worldwide economic outlook “remains solid”, aided by the new US-Mexico-Canada agreement. He explains, “The US economy is especially robust and is expected to moderate over the projection horizon, as forecast in the Bank’s July Monetary Policy Report. The new US-Mexico-Canada Agreement (USMCA) will reduce trade policy uncertainty in North America, which has been an important curb on business confidence and investment.”

That said, trade conflict, particularly between the United States and China, is weighing on global growth and commodity prices,” he admits. “Financial market volatility has resurfaced and some emerging markets are under stress but, overall, global financial conditions remain accommodative.”

The Canadian economy continues to operate close to its potential and the composition of growth is more balanced. it is expected to average about 2% over the second half of 2018 to average 2.1% for the year and 1.9% in 2020. The projections for business investment and exports have been revised up, reflecting USMCA and the recently-approved liquid natural gas project in British Columbia. However, investment and exports will be dampened by the recent decline in commodity prices and the bank will monitor confidence levels and business investment in Canada. The economy was also helped by falling unemployment which hit a 40-year low to 5.8%, a 0.1% monthly decline in October. However, the numbers were boosted by a monthly fall in the labour force of 18,200. 
Consumer Price Inflation (CPI) dropped to 2.2% and is expected to remain close to the 2% target through until the end of 2020. Wage growth remains moderate. “Given all of these factors, Governing Council agrees that the policy interest rate will need to rise to a neutral stance to achieve the inflation target,” Mr Poloz concludes.
Canada money October 2018 - Halo Financial

Oil prices drop 20% in a month

Oil prices have suffered a major bear streak. Prices of West Texas Intermediate crude oil have fallen 20% in just a month, from $74 in October, a four-year high, to below $60 a barrel in early November and could drop to around $40 or even lower, experts have predicted. At a time when demand is slowing, crude oil production from the United States has hit record levels and other major producers, including the United Arab Emirates, have said they intend to boost output in 2019. Canada is the world’s seventh biggest oil producer with around 4.2 million barrels a day in 2017. It has the third largest oil reserves in the world. Canada is also the largest foreign supplier of crude oil to the United States, with 43% of imports or 3.3 million barrels a day. That is why the loonie is often sensitive to commodity prices.

A fresh blow has now been dealt to Canada’s energy sector, as a judge in Montana has blocked the building of the $8 billion Keystone XL Pipeline. The pipeline, which has been the subject of strong protests from environmentalists and native Americans, is planned to stretch 1,179 miles from Canada’s oilsands in Alberta to Texas. Judge Brian Morris says the Trump administration had "discarded" facts when it approved the Keystone XL Pipeline in 2017. He has ruled that construction cannot go ahead until a more thorough review of the impact on the climate, cultural resources and wildlife has been conducted. Construction on the United States part of the pipeline was due to start next year. The administration can appeal against the ruling.
Theresa May ‘confident of Brexit deal’

With only four months to go until Britain is set to leave the European Union, the two sides are closing in on a Brexit agreement. GBP has been pulled up and down by rumours of success and failure in reaching an agreement with the European Union over the exact terms of the exit on 29 March 2019 and relief at the possibility avoiding the uncertainty of a no-deal Brexit. Now, a deal is so close that there are calls from MPs of all sides to see the legal advice concerning the last major stumbling block – finding a way of maintaining an open border in Ireland once Britain leaves the EU. The advice was requested by Prime Minister Theresa May and has been drawn-up by Attorney General Geoffrey Cox.

At present, the UK and Ireland are both part of the EU market and customs union, so there is no need to inspect goods and products. But after Brexit, Ireland and Northern Ireland may be subject to differing customs regulations, which would require border checks. MPs want to understand the implications of any backstop deal, but Downing Street says the government does not normally discuss such legal advice. However, former Brexit Secretary, David Davis, says if Mrs May’s Brexit deal comes before the Commons, she is probably going to lose the vote. On the other hand, Foreign Secretary, Jeremy Hunt, says he is confident of a deal being reached before the end of November. In addition, the Democratic Unionist Party says Mrs May is breaking promises to avoid a hard border in Ireland. Leader, Arlene Foster, says in a leaked letter to The Times, that the Prime Minister was "wedded to a border down the Irish Sea" as a fallback option for avoiding checks, if no free trade deal is reached in time. But Downing Street insists Mrs May is committed to avoiding a hard border.
Having survived the perils of the Tory conference and whispers of leadership challenges, UK Prime Minister, Theresa May, is also reportedly confident of soon reaching a deal with Europe. However, she says this will “not be done at any cost" to the UK.

Should an acceptable deal be reached between Britain and the European Union, the Pound could receive a boost against the Canadian Dollar, even if only temporarily. The UK Budget in late October, announcing the end to austerity, brought a boost in spending and a change in growth forecasts, bringing the Pound to a monthly low against the Canadian Dollar. UK growth in 2018 was forecast to be 0.2% lower than expected at 1.3%, due to impact of bad Spring weather. But the 2019 forecast was raised 0.3% to 1.6%, with 2020 and 2021 growth estimated at 1.4%, 2022 at 1.5% and 2023 at 1.6%, UK Chancellor of the Exchequer, Philip Hammond, announced. On 9th November there was good news that the UK economy grew 0.6% in Quarter 3, 2018, with higher spending encouraged by warmer weather. But most of the growth came in July, with slowdowns in August and September and analysts fear that growth will fall back in the final three months of the year. 
Guidance for buyers

1.7300 is now a clear area of resistance on the exchange rate and buyers should certainly consider reducing exposure close to those levels. The move higher has been rapid and it is no surprise that it is now correcting.

Guidance for sellers

Consider leaving protection above 1.7300, which has held firm since the move below back in July. A break above there would suggest a quick move higher to 1.7500.

GBP CAD November 2018

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