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Pound to Canadian Dollar Rate at 21-Week High, as Tories Lead in Polls

Market CommentaryPound to Canadian Dollar Rate at 21-Week High, as Tories Lead in Polls
Pound to Canadian Dollar Rate at 21-Week High, as Tories Lead in Polls
Pound to Canadian Dollar Rate.

The pound to Canadian dollar interbank exchange rate has hit 1.7074 in the last day. This is its highest in over 21 weeks, or since June 3rd 2019.

By comparison, back on August 12th, British sterling was as weak as 1.5891 versus the so-called loonie dollar. So it’s since risen by over 11 cents, or by 7.44%.

This may benefit you, because when you transfer money to Canada from the UK, you could get a higher Canadian dollar total, compared to if you’d exchanged currencies in the last 21 weeks.

In turn, this could make it more profitable for you if you’re buying property abroad in Alberta or Quebec, or if you’re making regular payments to Canada for your UK business.

To stay up-to-date with the value of sterling vs the loonie dollar on the interbank market, visit Pure FX’s Rates & Tools page. Here, select ‘GBP’ (Great British Pound) to ‘CAD’ (Canadian Dollar.)

Also, to check what’s affecting the pound to Canadian dollar rate recently, go to our GBP to CAD Exchange Rate Updates page. Here, simply click on the most recent article for the latest news.

One reason why the GBP/CAD interbank rate has hit this 21-week high in the last day is because the opinion polls suggest that the Tories may win a majority, at the UK’s upcoming election.

In addition, another factor why sterling has risen in value versus the loonie dollar is because, this Wednesday, the Bank of Canada (BoC) suggested that it may cut interest rates, below 1.75%.

Also, a third partial explanation why the pound to Canadian dollar interbank exchange rate has risen is because Canada’s GDP (Gross Domestic Product) grew less than forecast in August.

Pound to Canadian Dollar Rate Gains, as Tories Ahead in Polls

As I mention, one reason why the pound to Canadian dollar interbank exchange rate has reached this 21-week high in the past day is because, according to the latest opinion polls, UK Prime Minister (PM) Boris Johnson’s Conservative Party enjoys a solid lead, ahead of the general election on December 12th.

To explain, Mr. Johnson’s Tories stand at 35% in the latest surveys of Britons’ voting intentions, a full 10% ahead of the main opposition Labour Party, led by Jeremy Corbyn.

Behind them, Jo Swinson’s Liberal Democrats are polling at 18%, Nigel Farage’s Brexit Party stands at 11%, while the Scottish National Party stands at 4%.

Traditionally, under the UK’s First Past The Post electoral system, a 10% polling lead has been enough to grant the winning party a majority in the House of Commons. So this has strengthened the pound.

Sterling to Loonie Dollar May Be Affected, as Election Polls Often Inaccurate

However, it’s well know that the opinion polls have become increasingly unreliable in recent elections, as the public is far more likely to switch votes than in the past. So although the Conservatives are ahead in the polls, it’s not guaranteed that they’ll win.

For example, Jordan Rochester, a strategist at Nomura International, said yesterday that "The British electoral service has done some great work which shows around 35%-45% of voters have been switching their party allegiance over the last 3 election cycles.”

“So it is very volatile, the polls can move,” added Mr. Rochester. With this in mind, it’s by no means a sure thing that Mr. Johnson will win more MPs.

With this in mind, looking to the next six weeks, sterling could become vulnerable to movements in the opinion polls, as the financial markets try to guess who’ll form the next government.

Roberto Mialich, a strategist at UniCredit, says that “the electoral contest in Britain could leave sterling stuck in a sort of limbo where the currency may become more sensitive to electoral polls.”

So although the pound to Canadian dollar interbank exchange rate has hit this 21-week high, the election polls could be worth watching, for their effect on the value of sterling over the next weeks.

Sterling Vs Canadian Dollar Rises, as BoC Signals Interest Rate Cut

In addition, another reason why the pound to Canadian dollar rate on the interbank market has hit this 21-week high is because, this Wednesday 30th October, the Bank of Canada (BoC), Canada’s central bank, signalled that it may soon cut interest rates below their current 1.75%.

Until this week’s meeting, the BoC had indicated that Canada’s interest rates were “appropriate”.

This Wednesday, at the BoC’s latest interest rate decision, Canada’s monetary authority kept interest rates steady, as forecast by the financial markets.

However, at the BoC’s accompanying press conference, Governor Stephen Poloz suggested they might reduce borrowing costs in the near future. Mr. Poloz added that Canada’s recent economic resilience may soon be “tested”, according to The Financial Post.

In particular, Mr. Poloz suggested that the BoC could soon cut interest rates, because until now, Canada’s is the only major central bank to keep borrowing costs steady, in spite of the US/China trade war.

As a result, the BoC Governor said yesterday that “We are not an island”, indicating that Canada’s central bank will soon cut interest rates, to follow the global trend to lower rates.

Mr. Poloz may wish to cut Canada’s interest rates, because if Canada’s borrowing costs remain the same while those around the world fall, this makes investing in Canadian assets increasingly attractive.

However, this tends to increase the value of the Canadian dollar, which in turn makes Canada’s exports more expensive. Then, this could slow Canada’s economic growth.

So the BoC could cut interest rates in the foreseeable future, to ensure that CAD-denominated assets aren’t too profitable for the world’s money managers, to ease demand for the Canadian dollar.

This will help ensure that Canada’s exports remain competitively priced, so that Canada’s manufacturers can continue to sell their goods overseas, without their sales falling adversely.

For example, Fritz Louw, an analyst at MUFG, said this week that "The BoC looks to have become a little less comfortable with standing out from other central banks and took the opportunity to rein back that divergence by encouraging some renewed speculation of monetary easing.”

Mr. Louw added that: “The BoC left us with the impression that they wanted to dampen Canadian dollar strength.”

GBP to CAD Rate Hits 21-Week High, as Canada’s GDP Disappoints in August

Furthermore, another partial explanation why the pound to Canadian dollar interbank exchange rate has reached this 21-week high in the last day is because Canada’s economy grew less than forecast in August, said official statistics yesterday.

According to StatsCan on Thursday 31st October, Canada’s GDP rose by just 0.1% in August, below economists’ predictions for a 0.2% gain, according to Reuters.

This disappointing rise in GDP follows July’s stagnant 0.0%, so suggests that Canada’s economy flatlined over the Summer. According to Avery Shenfeld, chief economist at CIBC Capital Markets:

"This weakness could be blamed on a fall in wholesaling, and disruption in energy output on the east cost (as well as softer oil sand output). The Bank of Canada is anticipating a mediocre Q4.”

To this end, this Wednesday the BoC reduced its GDP growth forecasts for Canada in 2020 by 0.4%, to just 1.6%. Canada’s central bank said that the economy is likely to be “tested”, both by the US/China trade war, as well as falling global economic growth.

This week’s weaker economic growth forecasts suggest that this may already be the case, justifying the BoC’s rising caution.

The Canadian dollar tends to depreciate in value when Canada’s economy slows, because this means there are fewer investment opportunities in Canada.

After all, when the economy grows slowly, households are less likely to spend, and businesses less inclined to hire new staff or buy new equipment. This discourages investors from buying the loonie dollar, lowering its value.

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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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