Canadian Dollar Slumps on Oil Data, CIBC Forecast GBP/CAD Recovery Through 2017
CIBC Economics have updated clients with their latest foreign exchange forecasts and it appears the worst could now be behind GBP/CAD.
The Pound to Canadian Dollar exchange rate has shot higher on Wednesday 2nd November after it was reported inventory of oil stocks has risen to unexpectedly high levels.
EIA crude oil inventories reported a surprise build of 14.4M barrels versus the 1.8M expected - this represents the largest build of inventories in history.
High inventory of oil reserves implies lower oil prices as supply outstrips demand and for a currency that derives much value from oil prices this is clearly a negative.
The Canadian Dollar fell across the board following the release and is quoted as being 0.8% lower at 1.6520 againt the Pound while USD/CAD is trading a quarter of a percent higher at 1.3421.
Oil prices were nearly 3% lower on the release.
GBP/CAD sees the Worst Come to Pass
Indeed, a higher likelihood that the Bank of England (BoE) will now seeek protect Sterling from further devaluations has lead analysts at CIBC Markets to forecast a rise in the GBP/CAD exchange rate.
This echoes the views of analysts at Nordea Markets who also see the Bank unwilling to preside over an unruly decline in Sterling as it would place notable upside pressure on inflation.
“BoE Governor Carney, former head of the Bank of Canada, has mentioned that there is a limit to his central bank’s willingness to look beyond an overshoot of their inflation target. As a result, it will be important to monitor the effects of currency passthrough on UK monetary policy communications, with BoE officials possibly using verbal intervention to limit further currency depreciation,” says CIBC’s head of Economics, Royce Mendes.
The note comes a day after the BoE Governor confirmed he will be staying in the job until 2019, an announcement that was met by an appreciation in GBP/CAD.
The move was the latest step in the pair's recovery that has been in place since the low at 1.5928 was reached on 16th October.
Our latest technical studies suggest further advances are likely while others suggest that the pair is merely witnessing a period of appreciation ahead of another turn lower.
Latest Pound / Canadian Dollar Exchange Rates
  | Live: 1.862▲ + 0.1%12 Month Best:1.8915 |
*Your Bank's Retail Rate
| 1.7987 - 1.8062 |
**Independent Specialist | 1.836 - 1.8434 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
The Canadian dollar meanwhile is expected to take a hit from slowing economic growth.
“As we had expected the Bank of Canada revised down its forecasts for growth over the next couple of years and indicated that a rate cut is certainly on the table should growth disappoint further,” says Mendes.
The recent uncoupling of CAD from oil excluded the currency from the gains of the commodity, however, this is mainly because the rise was purely based on a self-imposed planned supply limit, not a change in ‘real’ supply or demand.
Despite an aggressive fiscal stimulus programme from the government the Bank of Canada (BOC) may still be required to chip in with more monetary stimulus, however, the chances of BOC implementing more easing is still relatively low at just above 30%.
CIBC see the Pound to Canadian Dollar exchange rate at 1.64 - close to its current level - as being reached at the end of 2016.
This will then be followed by a further rise to 1.72 at the end of Q1 2017, 1.75 at the end of Q2, 1.77 by Q3 and 1.84 at the end of Q4.
