GBP/CAD rates rocketed and settled just below 1.94 as markets were astounded by the rally Sterling had on Wednesday following strong wage growth data. The reason why the effect was so strong was two fold.
Firstly, wage growth is arguably the most important factor Central Banks look at when deciding the base interest rate for an economy. These current and historically low interest rates were introduced following the financial crisis to stimulate spending and keep the economy going in the depths of recession. Why save money when it was earning almost nothing sitting in a savings account? However, with rising wages disposable income has been increasing as a corollary of this, the incentive is less necessary. So markets saw this as evidence that the timeline for the UK raising interest rates had moved forward. Markets recieved this well, which is why Sterling was invested-in massively, as market participants hoped for long term returns. For those looking to purchase a property or make a transfer to Canada, the affect of this was to move GBP/CAD rates heavily in your favour, your Pounds now go a lot further.
The reason why it moved so much in your favour is another knock on of the financial crisis. After 8 years of contraction in many economies, investors are desperate for opportunities. If interest rates rise in the UK, this will be an opportunity that has been sorely missed on the financial markets for some time. When the sun rises once more for simple returns on currency investments, investors want to be there on the starting line. This is why even a small hint that raising interest rates was enough to move GBP/CAD rates by more than 2 cents in a single day’s trading.
The rates moved back slightly today as the CAD got an indirect boost. This was from a very pessimistic stance taken on the same interest decision being faced by the US FED. They were less optimistic as the British recently, which sent capital flying into CAD, and boosted its value in the short-term. So GBP/CAD rates closed slightly lower at the end of trading today than Wednesday.
With the big data release looming tomorrow, the real question is where will the rates shift from this historic 6 year high position they are currently at?
Tomorrow inflation data and retail sales figures will be released for the Canadian economy. For those looking to buy CAD I believe there is little to gain but a lot to lose by waiting. Retail Sales figures are likely to come in poorly, however, markets expect this. Due to the oil slump there is less disposable income in Canada, so the markets have already priced in poor figures. The same is true for inflation, due to low oil prices inflation is likely to be poor as well, it is a similar situation to the UK but not as extreme. So poor data is already expected, so that means the GBP/CAD rates are unlikely to get more attractive, but there is room for them to be fall.
Some of the posts this week have talked about the manufacturing boom in Canada, and their efforts to diversify their economy in the face of a global oil slump. I am not expecting strong data, but I would not be surprised if it came in better than expected. If so, the rates will tumble, and likely we will find ourselves back where we started at 1.91 this week.
Those looking to buy CAD should contact me overnight on [email protected] to discuss any currency requirements you may have. You may not require CAD until later in the year, but these rates can be pegged at no cost so that you do not have to ‘hope’ these historic rates are still available when you require them.