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CAD to GBP Rate Hits 2-Month High, on UK Trade Talks Concern

Market CommentaryCAD to GBP Rate Hits 2-Month High, on UK Trade Talks Concern
CAD to GBP Rate Hits 2-Month High, on UK Trade Talks Concern
Canadian Dollar to Pound.

The Canadian dollar to pound interbank exchange rate stands at 0.5893 today at the time of writing. This is its highest in 8 weeks, or since November 11th.

By comparison, back on December 13th, the CAD to GBP interbank exchange rate was as weak as 0.5632. So it’s since strengthened by 2.5 cents, or by 4.63%.

This could benefit you, if you’re a Brit selling property abroad in Alberta or Ontario to repatriate the funds to the UK, or if you’re a Canadian emigrating to Great Britain.

This is because, when you transfer money to the UK from Canada, you might get a higher pound total, compared to if you’d exchanged currencies in the last two months.

To stay up-to-date with the Canadian dollar to pound interbank exchange rate, visit Pure FX’s Rates & Tools page. Here, select ‘CAD’ to ‘GBP’ to see this week’s interbank rates.

Also, to check what’s affecting the value of the so-called loonie dollar versus sterling, go to our CAD to GBP Exchange Rate Updates page. Here, click on the latest article.

One reason why the CAD to GBP interbank exchange rate has hit this two-month high today is because investors are concerned about the UK’s future EU trade deal talks this year.

Another factor why the Canadian dollar has hit this two-month high against sterling on the interbank market is because UK manufacturing shrank at the fastest pace since 2012 in December.

A third partial explanation why the loonie dollar has gained in value versus the pound is because Canada’s interest rates remain comparatively high next to the rest of the industrialised world.

Canadian Dollar to Pound Gains, as Investors Concerned by UK/EU Trade Talks

As I mention, one reason why the Canadian dollar to pound interbank exchange rate has hit this two-month high of 0.5893 today is because the world’s investors are concerned about the UK’s future EU trade deal negotiations this year.

In particular, they’re concerned that the talks could be difficult, following the extended Brexit negotiations, and by the tight deadline the UK has set.

Recently, UK Prime Minister (PM) Boris Johnson passed legislation, which limits the UK’s future EU trade deal talks to the end of this year, December 31st 2020.

This is even though Article 50, the terms of the UK’s exit from the EU, allows the trade talks to continue for two years, as well as the fact that such negotiations usually take six or seven years to finalise, based on similar past deals.

Seemingly, PM Johnson has set this tight deadline, both to demonstrate his commitment to “get Brexit done” and to pressure the EU to agree a favourable agreement quickly.

In particular, the PM might be aiming to win the approval of Britons who voted for the Conservative Party, at the UK’s general election last Thursday 12th December, which was widely called a “Brexit election”.

However, for the world’s financial markets, PM Johnson’s decision risks creating a new Brexit “cliff edge”.

This is because, if the UK doesn’t finalise its future EU trade deal by the PM’s deadline, the UK risks defaulting to trading with Europe on World Trade Organisation (WTO) terms. This might involve more tariffs and bureaucracy, thereby slowing the UK’s economic growth in 2021.

Moreover, it’s worth noting that the UK’s Brexit negotiations took over three-and-a-half years, from the referendum on June 23rd 2016 up to now.

With this in mind, the world’s money managers are concerned that the UK/EU future trade talks might be similarly lengthy, even with PM Johnson’s one-year deadline. So this worry has weakened the value of sterling on the interbank market.

Jane Foley at Rabobank says that “In the UK, the year is unlikely to bring much reprieve from Brexit-related news. Trade negotiations between the UK and the EU will dominate much of the domestic political landscape this year.”

“If talks are difficult, a ‘no-deal’ Brexit would still be a prospect for the UK at the end of 2020. This could bring strong downside potential for the pound,” adds Mrs. Foley.

Meanwhile, Lee Hardman, currency analyst at MUFG says that “Pound volatility has eased recently but remains higher than in other major currencies reflecting in part ongoing uncertainty over various outcomes of trade negotiations between the UK and the EU this year.”

With this in mind, we’ll see how the UK’s future EU trade talks progress in 2020, and their effect on the pound.

CAD to GBP Rate Rises, as UK Manufacturing Shrinks at Fastest Pace in 7 Years

In addition, another factor why the CAD to GBP interbank exchange rate has reached this eight-week high today is because the UK’s manufacturing sector contracted at the fastest pace in seven years in December 2019, said trusted statistics this week.

This may bode ill for the UK’s GDP (Gross Domestic Product) growth in 2020, especially with the uncertainty of the EU trade talks.

According to economics watchdog IHS Markit yesterday, the UK’s factory PMI (Purchasing Managers’ Index) fell to 45.6 in December, from 49.1 in November.

This is below the 50.0 figure that signals economic expansion, and the sharpest decline in seven years, since 2012, back when the UK was emerging from the global financial crisis. So it’s a clear slowdown in UK factory activity.

In particular, orders, output and employment all fell in the UK’s factory sector. IHS Markit explained that the slowdown was due to Brexit uncertainty, falling domestic demand, as well as the global economic slowdown, caused partly by the US/China trade war.

So this risks weighing down the UK’s economic growth in the final three months of 2019, between October and December.

Rob Dobson, economist at IHS Markit, says about these figures that “With demand weak and confidence remaining subdued, input purchasing was pared back sharply and jobs were cut for the ninth successive month.”

“On this basis, it looks like UK manufacturing and the broader economy may both start the new decade as they began the last,” adds Mr. Dobson. In turn, this has weakened the pound.

Loonie Dollar Strengthens Versus Sterling, as Canada’s Interest Rates Remain Higher

Moreover, a third partial explanation why the CAD to GBP interbank exchange rate has reached this eight-week high today is because Canada’s interest rates remain comparatively high, next to the UK and the rest of the industrialised world.

This strengthens the Canadian dollar, by making it more attractive for the world’s money managers to buy and invest in CAD-denominated assets.

In particular, interest rates at Canada’s central bank, the Bank of Canada (BoC), stand at 1.75%. This compares to 0.75% in the UK, 1.5%-1.75% in the USA, and 0.0% in the Eurozone.

So as we can see, when the world’s investors buy CAD-denominated assets, they’ll get a higher return on investment than elsewhere. This lifts demand for the Canadian dollar, and thus its value.

Canada’s interest rates are higher than elsewhere in the industrialised world, in part because Canada’s inflation is closer to the BoC official 2.0% target.

For example, in November 2019, Canada’s price pressures stood at 2.2%, above target, while in the UK they were at 1.5%, below target. So this encourages the BoC to keep interest rates higher, to try and keep a lid on growing prices.

In addition, Canada’s interest rates also stand higher than the UK’s, in part because Canada’s economy is relatively unaffected by Brexit.

After all, over the last three-and-a-half years, the UK’s decision to leave the EU has weighed down Britain’s GDP growth and slowed business investment. By comparison, Canada is an ocean away, and trades mostly with the United States, not the EU.

Elsewhere, the Canadian dollar to pound interbank exchange rate has also strengthened, because the USA and China recently announced that they’ll formally sign their “first phase” trade deal, on January 15th.

Here, the world’s two largest economies will reduce their tariffs on each other, following an 18-month trade war. In particular, China will buy more American farm goods, like soy.

This has lifted the value of the loonie dollar, because the USA is Canada’s closest trading partner. So if America’s economy accelerates as a result of the trade truce, US firms might buy more Canadian exports.

In consequence, this could strengthen Canada’s GDP growth in 2020 too. So the effects of the trade truce on Canada’s economy could be worth watching for, and on the Canadian dollar.

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Please bear in mind, this article is Pure FX’s opinion only and does not constitute advice. Moreover, the exchange rates referred to in this article are the interbank rates, which are the rates at which banks and financial institutions buy and sell currency to each other. Therefore these exchange rates cannot be accessed by individuals or SMEs, and are not the same rates that Pure FX can offer. To get a free exchange rate quote, call us on +44 (0) 1494 671800, or Contact Us.

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