The Pound to Canadian Dollar exchange rate (GBP/CAD) touched a fresh 4-year high yesterday of 1.7515 as strong UK data boosted Sterling and concerns surrounding the Bank of Canada’s dovish outlook negatively impacted the ‘Loonie’.
Back in July when Mark Carney moved across the Atlantic from the Bank of Canada and took over the role of Governor at the Bank of England, GBP/CAD was trading in the region of 1.6000. During that five-month timespan the Pound has strengthened by over 14 cents against the Canadian Dollar.
This is not to say that Carney’s arrival at the BoE is the main reason for Sterling’s ascent, nor to assert that his departure from the BoC is directly linked to the Canadian Dollar’s decline. However, there are some differences between Mark Carney and the current BoC Governor Stephen Poloz that could have contributed to GBP/CAD’s impressive surge.
Forward guidance gains
One of Carney’s first moves when he took control at the Bank of England was to announce a forward guidance policy to convince UK businesses and consumers that interest rates will remain at the current record low for a long period of time. The BoE stated that interest rates will not be raised until Unemployment falls below 7.0%, or CPI inflation rises above 2.5% for a period of 18-24 months.
However, with GDP growth accelerating rapidly and private sector output improving at multi-year highs, investors interpreted the forward guidance as an exit strategy from the Bank’s ultra-loose approach to monetary policy and this bolstered demand for the Pound.
Dovish BoC
In stark contrast to the situation in the UK, Canadian growth has subdued over the last few months and concerns with the housing market recently led BoC Governor Stephen Poloz to alter the Bank’s policy outlook. After months of suggestion that the Bank of Canada was considering hiking interest rates, the October Minutes report did not feature any hawkish language of this nature and the ‘Loonie’ declined sharply in response.
Coming from a background at Export Development Canada, where he was tasked with boosting export growth, Poloz is predisposed to favour a weaker currency. This is because a softer domestic currency can help make export goods and materials more affordable to foreign buyers.
Today’s schedule
Later this afternoon the Bank of Canada is widely expected to maintain its current benchmark interest rate of 1.00%, but traders are cautious that Poloz could weaken the ‘Loonie’ by hinting that the BoC is moving towards a reduction of rates.
The Pound to Canadian Dollar exchange rate could also appreciate if this morning’s UK Service Sector PMI report prints positively. Both Construction and Manufacturing have outperformed analysts’ expectations so far this week and a stronger-than-expected Services report would likely send GBP/CAD to a fresh 4-year high.
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