Forecasts show the GBP to CAD conversion sliding towards 1.55 in 2017 while the US Dollar should continue to push higher.
The Canadian Dollar is set to outperform the Pound in 2017 argue Royal Bank of Canada in their latest financial projections for the year ahead.
However, the US Dollar should maintain the upper hand against its North American cousin for the duration of the coming 12 months.
RBC Capital Markets believe Canada will benefit from improved growth levels in 2017 with their financial forecasts for the currency assuming growth will pick up to 1.8% in 2017, a slightly above-trend pace improving on gains of 0.9% and 1.3% in 2015 and 2016, respectively.
By contrast, growth in the UK is expected to stall in 2017 despite rising above the banks previous forecasts in 2016.
This is mainly due to the delayed impact of Brexit on the economy.
“The slowdown relative to 2016’s 2% gain is expected to reflect weaker consumer spending (as inflation rises due to currency depreciation while wage growth is likely to stagnate) and a decline in business investment (given uncertainty surrounding the UK’s future access to the EU’s Single Market),” says RBC Capital's Josh Nye.
Nye and his colleagues expect growth in the UK economy will slow next year, although given stronger-than-expected momentum following the referendum they have revised up their 2017 GDP growth forecast to 1.1% from 0.4% previously.
Stronger Canadian Consumer to Aid Growth
In the case of Canada, however, RBC are more optimistic saying increased growth will come because of three main factors:
An increase in government outlays as fiscal stimulus ramps up, strengthening exports, and a modest gain in business investment that contrasts sharply with sizeable declines in each of the last two years.
The Canadian consumer is expected to increase their spending in contrast to the UK consumer.
This is as a result of the asymmetrical trajectory of their labour markets – higher employment for Canada and lower for the UK.
The UK consumer will also be put off making purchases by higher inflation from the weaker Pound.
In Canada, homeowners will reap the harvest of appreciating property prices.
In the UK, companies will rein in investment due to uncertainty over the final form of Brexit.
Bank of England to Cut Interest Rates + Forecasts for GBP/CAD
The Bank of England will respond to this slowing growth by taking action that is deemed supportive of the economy - cutting interest rates and/or boosting quantitative easing.
Whenever these measures are deployed UK bond yields come down, which in turn puts notable pressure on the currency.
The current quantitative easing programme is set to end in January and RBC expect the BoE to resume or extend QE for longer.
This view contrasts to that held by a number of other banks in which expectations for further GBP-negative easing have been scrapped owing to the unexplectedly strong momentum seen in the UK economy heading into year-end.
If RBC Capital are correct and the Bank eases this will certainly weaken the Pound.
This will see GBP/CAD fall through the front half of 2017, from where a subdued recovery will take place.
The Bank of Canada (BoC) on the other hand is forecast to leave interest rates and policy in general unchanged.
This will be neutral for the Canadian Dollar.
The combination of the two forecasts suggests the Pound will depreciate versus CAD.
GBP/CAD is forecast to fall to 1.66 by the time 2016 is over and the downmove will take it to 1.55 by the end of March 2017.
Analysts forecast a recovery to 1.59 by June, 1.61 by September and 1.63 by the end of the year.
US Dollar to Benefit from Continued Economic Momentum
The US Dollar is however forecast to outperform both the CAD and GBP.
US Q3 GDP growth was revised up to 3.2% in the second estimate from 2.9% in the advance report.
"We expect activity will continue at an above-trend pace in the final quarter of the year, albeit with a slightly more moderate 2.1% gain as the previous quarter’s contributions from net trade and inventories are not likely to be repeated," say RBC Capital.
Growth in domestic demand is expected to strengthen, however, led by a rebound in residential investment as both existing home sales and housing starts began the quarter at cycle highs.
Consumer spending is also forecast to continue growing at a solid clip―real PCE was up just 0.1% in October but built on a sizeable September increase, and a strong labour market backdrop is expected to fuel spending this holiday season.
RBC expect the Fed to raise interest rates in December but they should still maintain a subdued rate of rises in 2017, until the fiscal spending plans of Donald Trump become clearer.
If Trump pushes ahead with an agressive investment plan then inflation could move higher, this in turn could force the Fed to raise rates faster than currently anticipated.
"Focus has now shifted to 2017 and whether potentially-inflationary fiscal stimulus will force the Fed to raise rates faster than the gradual pace that has prevailed. However, until further details on the fiscal backdrop (and other risks that cloud the outlook) are available, we expect the Fed will stick with its base case that accommodation will be removed slowly and rates are likely to remain below longer run neutral levels for some time," say RBC.
The upside risks to the US Dollar therefore look biased to the upside.
RBC forecast the USD/CAD exchange rate to trade at 1.35 by the end of March, 1.38 by the end of June where it should hover through the remainder of 2017.