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2019

Sterling | Canadian Dollar Quarterly Forecast Q3 July-September 2019

Published: Tuesday 09 July 2019

Stronger Gross Domestic Product and exports take pressure off Bank of Canada

  • Election affects Canadian Dollar
  • Canada hits low in competitiveness ranking
  • Prime Minister warns of no deal Brexit
By Halo Financial Team - Technical Analysis by Charlie Horsley, Senior Currency Consultant

GBPCAD has followed the pattern of other major pairings over the last three months. And Brexit uncertainty is to blame. There has been a steady decline in sterling from April-June and beyond. The high of 1.771 in typical mid-market rates came on 6th May, as UK Prime Minister Theresa May invited the Labour opposition to join Brexit talks. The low of 1.659 followed on 30 June. In early July, the value fell further to 1.646, as no-deal Brexit looked more likely. This is an 18-month low in GBPCAD. Adding to the Pound’s woe against the loonie is the fact that the Canadian economy has seen record exports in May and GDP up 0.3% in April – the second strong performance in a row and the best for 18 months.
 
Stronger GDP and exports take pressure off BoC

After an early hiccup, the Canadian economy showed significant improvements, strengthening the loonie against major currencies. Things looked gloomy in April when the Bank of Canada (BoC) lowered its 2019 Gross Domestic Product (GDP) growth prediction from 1.7% to 1.2%. It also predicts 2.1% growth in 2020 and 2% the year after. The results saw the Canadian Dollar weaken. However, in May, it was announced that the Canadian economy grew by a stronger than expected 0.5% in March. This compensated for a 0.1% contraction in February. More good news was to follow when there was a surprising 0.3% gain in April’s GDP, according to Statistics Canada. This was the best two-month increase since the end of 2017. Growing oil output boosted the results, with Alberta oilsands extraction up 11%.
Then, in June, Canada enjoyed a trade surplus for the first time in more than a year. It posted a gain of $762 million, with exports to the United States risking to an all-time monthly high of $39.3 billion. In all, exports rose 4.6% to $53.1 billion in June. The figures included a surge in shipments to the U.S., especially cars and car parts, which rose by 12.4% to $8.4 billion. Overall, Canadian exports to the U.S. rose to a monthly record of $39.3 billion. At the same time, imports rose 1% to $52.3 billion. In April, the trade deficit was $0.97 billion. The raft of good news helped business sentiment to rise.
The Bank of Canada’s new Summer Business Survey showed positive hiring and investment intentions. Following a decline in the spring survey, the Business Outlook Survey (BOS) indicator edged up to just above zero, consistent with a slight improvement in business sentiment. The survey of 100 businesses, carried out in May and early June, showed expectations of growing sales from both domestic and foreign customers and clients. The good news means that there is not so much pressure on the Bank of Canada to cut interest rates, as other central banks have done recently, or are considering.
Cost of living concerns in Canada
Even with signs that the Canadian economy is strengthening, a third of Canadians are still worried about the cost of living, according to a survey from CBC. And with a federal election due on or before 21st October, that is a concern for the ruling Liberals. Affordability is a particular problem faced by property buyer, particularly in Toronto and Vancouver, and those needing childcare. While just one in 10 Canadians say they are not getting by financially, another 68% "have to think about how they spend money." With record employment figures, it is puzzling that 35% of those polled are most worried about jobs/the economy. But the reality of ‘real-life’ is not always reflected by data. Many analysts believe the uncertainly caused by the election could weaken the loonie from now on.

Canada hits low in competitiveness ranking

Despite the recent strengthening of the economy, Canada has fallen to its lowest position ever in the MD World Competitiveness Rankings and outside the top 10. It fell three places in the 2019 rankings to 13th out of 63 countries surveyed. Canada’s competitiveness has been declining since 2015, with lower oil prices taking their toll. One major issue is its reputation for caution, rather than innovation and creativity.  However, Canada scored strongly for talent, coming sixth. It was 12th for economic performance and infrastructure, 14th for government efficiency and 16th for business efficiency.
The index measures how productive a country is by examining 235 indicators. These include “hard” statistics such as unemployment, GDP and government spending on health and education, as well as “soft” data from an Executive Opinion Survey covering topics such as social cohesion, globalization and corruption. This feeds into four categories – economic performance, infrastructure, government efficiency and business efficiency – to give a final score for each country. Arturo Bris, IMD Professor and Director of IMD World Competitiveness Center, which complies the ranking, says, In a year of high uncertainty in global markets due to rapid changes in the international political landscape as well as trade relations, the quality of institutions seem to be the unifying element for increasing prosperity. A strong institutional framework provides the stability for business to invest and innovate, ensuring a higher quality of life for citizens.”
 
PM warns against no-deal Brexit

Theresa May is warning about the dangers of a no deal Brexit, despite the two candidates to replace her continuing to flirt with the option. In her final speech in Scotland as British Prime Minister, Mrs May has warned that a no-deal Brexit threatens the future of the country. And she says that she will continue to fight against it from the backbenches. A spokesperson says Mrs May has “always been very clear about what she sees as the virtues of leaving in an orderly way, with a deal. The uncertainty over a no-deal Brexit looks to be hitting business sectors and the economy. According to IHS Markit and the Chartered Institute of Procurement and Supply, growth in the UK’s service sector stagnated in June. The sector accounts for four-fifths of the UK economy.
If confirmed, the quarterly contraction in the UK economy would be the first for seven years. The seasonally adjusted IHS Markit/CIPS UK Services PMI® Business Activity Index posted 50.2 in June, down from 51.0 in May and the lowest reading for three months. The index registered only fractionally above the 50.0 no-change mark and therefore signalled that business activity was close to stagnation in June. Business activity in Britain’s manufacturing and construction sectors has already reversed, other Markit surveys suggest. Chris Williamson, the chief business economist at IHS Markit, suggests UK economic growth probably contracted by 0.1% in the second quarter. Both would-be UK Prime Ministers – Boris Johnson and Jeremy Hunt – say Britain will leave the European Union by 31 October if not before, with or without a deal. First, poll favourite Boris Johnson suggested he would take the country out of the European Union on 31 October “come what may, do or die” – although  a day later, he said that the chances of a no-deal Brexit are a “million-to-one against”. Then rival Jeremy Hunt stated he would take Britain out of Europe by 30 September, whether or not a deal is able to be reached. The Pound has suffered as a result, as the foreign currency markets dislike uncertainty and are concerned about the implications of a no-deal Brexit on the economy.
Mark Carney, the Governor of the Bank of England, told the Treasury Committee that under a no-deal Brexit interest rates would need to be cut and a new stimulus package would have to be introduced. On the other hand, if a smooth exit can be agreed, then the bank would expect rates to rise gradually. But fears of a no-deal Brexit had risen and the short-term uncertainty was continuing to damage businesses and the economy, he warned. UK business leaders are continuing to press for agreement to be reached with Europe. Make UK, which represents manufacturing and engineering firms, says leaving without a deal would be “an act of economic vandalism”. The Confederation of British Industry says jobs and livelihoods depend upon the new prime minister securing a good deal with the EU.”
As we highlighted, the manufacturing industry is concerned after activity slumped to a six-year low. The IHS Markit/CIPS manufacturing purchasing managers’ index (PMI) dropped from 49.4 last month to 48.0 in June, the lowest since February 2013. In addition, the output reading dropped from 50.3 to 47.2, the biggest fall since October 2012. Make UK says, “May’s plunge below the 50-threshold was not just a one-off with UK manufacturing activity collapsing to its lowest level in six and a half years.
Businesses are cutting back on both day-to-day and capital spending with the contraction in output a reflection of growing Brexit uncertainty and, worsening global trade winds. Ominously, the PMI’s output measure dropped to 47.2 from 50.3 in May, the biggest contraction in a single month since October 2012. Firms are reporting that export demand is falling month-on-month as customers around the world are losing confidence in the future of the UK market.
Looking ahead, the picture shows little sign of improvement with signs of weakness now spreading across the Eurozone. Given this outlook, increasing competition to see who can race to the bottom and act tough on ‘no deal’ is the height of irresponsibility with zero understanding of the consequences.” The election for a new Conservative Party leader came after British Prime Minister Theresa May resigned in early June 2019. In a series of votes, Conservative MPs whittled down contenders to just two. Party members have the final say, with the result of the vote announced on Tuesday 23 July. When the new leader – and the Prime Minister, will take office has yet to be announced.
 
 

What next for Sterling-Canadian Dollar?

In the next three months, we should find out whether Theresa May’s warnings over a no-deal Brexit have been heeded and what kind of Brexit the UK faces. The new Tory party leader and likely UK Prime Minister will want a deal with Europe, but both Boris Johnson and Jeremy Hunt say they are prepared for a no-deal scenario. That is likely to see the Pound weaken. The Canadian Dollar has strengthened recently thanks to positive economic news, but with the election on the horizon, it could come under pressure.
Sterling remains in a downtrend versus the Canadian Dollar. Whilst the rate seems poor at the moment, as the threat of a no deal Brexit increases there is certainly scope for further falls. The post Brexit low of 1.58 is certainly possible as the next level of support for the Pound. If that breaks, then it could signal much further weakness in the Pound.

Markets are very volatile in the current uncertain economic and political climate. If you are planning to exchange GBP and/or CAD, talk to your Halo Financial Currency Consultant as early as you can in your plans, to make the most of market uncertainty and protect against currency risk.

Guidance for CAD buyers

CAD buyers should assess the risk of how they would be affected by a 1.58 level and lower and take action accordingly. If Jeremy Hunt beats Boris Johnson to become the next UK prime minister there should be a Sterling bounce, as he is more pragmatic about the leave date in October.

Guidance for CAD sellers

CAD sellers should see how the downtrend continues, but be ready to act quickly if we see signs of a reversal, because we are at excellent levels currently. We would caution against being too greedy at this stage, however, as currency markets have altered quickly from this position in the past.
 

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