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Canadian Dollar to Pound Rate Rises, as Poloz Says Rates “About Right”

Market CommentaryCanadian Dollar to Pound Rate Rises, as Poloz Says Rates “About Right”
Canadian Dollar to Pound Rate Rises, as Poloz Says Rates “About Right”
CAD to GBP Rate.

The Canadian dollar to pound interbank exchange rate has risen in the past day, from a low of 0.5791 yesterday to 0.5839 today, a gain of 0.82%.

This may benefit you, if you’re a Canadian citizen emigrating to the UK, or you’re a Canadian business owner making international payments to your UK suppliers.

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

To stay up-to-date with the Canadian dollar to pound interbank exchange rate, visit Pure FX’s Rates & Tools page. Here, select ‘CAD’ (Canadian Dollar) to ‘GBP’ (Great British Pound).

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

One reason why the Canadian dollar has gained against the pound is because, yesterday, Bank of Canada Governor (BoC) Stephen Poloz said that Canada’s interest rates are “about right”.

Another factor why the CAD to GBP interbank exchange rate has strengthened is because the financial markets are increasingly concerned that there’ll be a ‘hung’ Parliament in the UK election.

In addition, a third partial explanation why the so-called loonie dollar has risen versus sterling is because, today, we learnt that the UK’s services and manufacturing sectors eased in November.

However, looking to 2020, the Canadian dollar to pound interbank exchange rate may be influenced, because BoC Deputy Governor Carolyn Wilkins has said that Canada’s interest rates may fall.

CAD to GBP Rate Gains, as Poloz Says Canada’s Interest Rates Are “About Right”

As I mention, one reason why the Canadian dollar to pound interbank exchange rate has strengthened in the last day is because, yesterday, bank of Canada (BoC) Governor Stephen Poloz said that Canada’s interest rates are “about right”.

This raises the possibility that Canada may keep interest rates at 1.75% next year, which would be higher than most of the industrialised world.

Speaking to a private audience at the Ontario Securities Commission on Thursday evening, it’s reported that Mr. Poloz said that Canada’s interest rates at 1.75% are “about right”, reports the Financial Post.

This remark surprised the financial markets, who’ve increasingly factored in the possibility that Canada’s central bank might reduce borrowing costs in the near future, like the rest of the developed world.

After all, so far this year, major central banks like the US Federal Reserve, European Central Bank, and Reserve Banks of Australia and New Zealand have all eased monetary policy.

This was beginning to make the BoC look like the “odd one out”, which risked making Canada’s exports more expensive, as the markets flocked to the Canadian dollar, to buy CAD-denominated assets.

With this in mind, it was thought that the BoC would cut interest rates in the coming months.

This is especially the case, because in Canada’s central bank’s monetary policy statement for October, the BoC removed a sentence that said Canada’s borrowing costs are “appropriate”. This appeared to pave the way for the BoC to ease monetary policy, to 1.5%, perhaps in March 2020.

However, in the event, Mr. Poloz’s remarks in Ontario yesterday suggest that a BoC interest rate cut is not a “done deal”. In part, this is because Canada’s inflation hit 1.9% last month, we learnt this week, very close to the BoC’s official target of 2.0%.

So from the point of view of pursuing the BoC’s inflation target, there’s no immediate need to cut borrowing costs below their 1.75%.

For example, Mazen Issa at TD Securities said about Mr. Poloz’s remarks yesterday that "this speech is not as dovish as some expected", meaning that the BoC Governor was more upbeat than predicted.

Mr. Issa added that Mr. Poloz’s “reference that monetary conditions are "about right" is a notable one”, and that “it suggests there is no particular urgency for the Bank to ease soon.”

With this in mind, if the BoC surprisingly keeps interest rates at 1.75% in 2019/20, this would further buck the global trend.

This would continue to make buying CAD-denominated assets more profitable than elsewhere in the industrialised world, where interest rates are lower. This would lift demand for the Canadian dollar among the world’s investors, and thereby increase its value.

Canadian Dollar to Pound Rate Strengthens, as Markets Fear UK ‘Hung’ Parliament

In addition, another factor why the CAD to GBP interbank exchange rate has gained in value overnight is because the financial markets are increasingly concerned that, after the December 12th UK general election, there’ll be a ‘hung’ Parliament.

This is when no single party wins a majority of MPs in Parliament, and could extend the UK’s ongoing domestic agenda and Brexit deadlock.

The world’s money managers have grown concerned that there may be a ‘hung’ Parliament next month, because two closely-watched opinion polls have shown the Conservative Party’s lead falling.

To start with, following this Tuesday 19th’s ITV debate between Prime Minister Boris Johnson and Labour’s Jeremy Corbyn, YouGov’s poll of 1,600 people showed that the event was a near draw.

Second, according to YouGov’s newest opinion poll this Wednesday 20th, the Conservatives’ lead has fallen by 5% compared to YouGov’s previous poll on Saturday 16th, to just 12%.

In particular, Mr. Johnson’s party has fallen by 3%, to 42%, while Labour has gained 2%, to 30%. This suggests that the gap between the two parties is closing, with less than three weeks before the vote.

These opinion polls have worried the financial markets, firstly because they echo the UK’s 2017 general election. Two years ago, the Conservatives similarly began with a substantial lead, only to end the campaign 2% ahead of Labour.

This caused former PM Theresa May to lose her Parliamentary majority, causing the deadlock and Brexit limbo we’ve seen in the House of Commons since.

Second, these opinion polls have weakened the pound, because if there’s another ‘hung’ Parliament in December, the UK’s Brexit deadlock may continue.

After all, a majority of MPs could continue to refuse approving PM Johnson’s deal with the EU. In this case, the UK could run down its renewed Brexit deadline, which has been extended from October 31st up to January 31st.

If this happens, there might be yet another tussle, in which one bloc of MPs tries to push the UK out of the EU with ‘No Deal’, while another attempts to force PM Johnson to request a fourth extension.

This would add considerably to the UK’s political uncertainty, further clouding the outlook for British businesses and investors, so has contributed to weaken the value of sterling today.

For example, Derek Halpenny at MUFG says that "If the election delivers a hung parliament, market participants could initially become more concerned over the return of 'no deal' Brexit risk by the end of January.”

“A continuation of Parliamentary deadlock would require another Article 50 extension as Boris Johnson’s Brexit plan would be unlikely to pass”, added Mr. Halpenny, thereby weighing on the pound.

Canadian Dollar Versus Sterling Rate Rises, as UK Services and Manufacturing Fall

Furthermore, a third partial explanation why the CAD to GBP interbank exchange rate has gained in value in the last day is because, this morning, we’ve learnt that the UK’s services and manufacturing sectors contracted in November.

This will raise concerns that the Brexit uncertainty is increasingly weighing on the UK economy, and slow GDP (Gross Domestic Product) growth.

According to economics watchdog IHS Markit’s services and manufacturing PMIs (Purchasing Managers’ Indices) for this month, the UK’s dominant services sector fell to 48.6, while UK factory activity dropped to 48.3, according to FX Street.

Both of these figures are below the 50.0 figure that separates economic growth from weakness, so point to falling economic output in the UK, in the last months of 2019.

In particular, the UK’s services sector makes up roughly 80% of economic output, so today’s decline is especially concerning. In October, the UK services PMI was 50.0, exactly straddling the line between expansion and contraction.

Meanwhile, the UK manufacturing PMI in October was 49.6, so this points to a deepening downturn. As a result, the CAD has strengthened versus the GBP.

CAD/GBP Rate May Be Influenced, as BoC Could Still Cut in 2020

However, looking to 2020, the Canadian dollar to pound interbank exchange rate may be affected, because the Bank of Canada (BoC) could still cut interest rates below 1.75%, in spite of Governor Poloz’s remarks yesterday.

This is because, earlier this week, BoC Senior Deputy Governor Carolyn Wilkins suggested that the central bank may ease policy in the foreseeable future.

Speaking at the International Finance Club of Montréal this Tuesday 19th, Ms. Wilkins said that "You want to put the winter tires on before the snow falls. It not only protects you, but also everyone else who’s on the road,” reports The Globe & Mail.

This metaphor means that the BoC could reduce interest rates before Canada’s economy weakens, to protect both the BoC’s credibility and Canadian firms and households.

Moreover, Ms. Wilkins even suggested that the BoC could launch its own version of extraordinary monetary stimulus, known as Quantitative Easing (QE).

This would involve flooding the financial markets with Canadian dollars, to reduce the cost of a loan for Canadian households and businesses. However, by greatly increasing the supply of Canadian dollars, it would also reduce its value.

So Ms. Wilkins remarks, alongside those of her boss Governor Poloz, suggest that there’s a difference of opinion at Canada’s central bank. The BoC may cut interest rates, or it may not.

In the meantime, Canada’s borrowing costs continue at 1.75%, above those of most of the industrialised world. This is supporting the value of the Canadian dollar to pound interbank exchange rate.

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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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