The UK’s pound sterling and the Canadian dollar have outperformed their major peers this year so far, despite both their respective countries facing significant political risks, along with foreign trade headwinds.
Kristian Rouz — Amid the mounting risks of a ‘no-deal’ Brexit in the UK, and the lingering trade tensions between Canada and the US, the British pound and the Canadian dollar have strengthened over the past few months.
The cable and the loonie — as the two currencies are known among traders — have defied political risks and enjoyed solid demand in the international market due to the strength of the British and Canadian economies this year.
According to current market data from Bloomberg, the British pound rose 2.3 per cent to $1.3381 as of Friday, posting its biggest year-to-date advance since April 2017. The appreciation of the British currency comes as economic growth in the UK has been better that in the Eurozone — despite the lingering speculation a disorderly Brexit could hurt the British economy.
The pound’s rise, however, is expected to have negative consequences to the British exports, while making imported goods more competitive in the UK’s domestic market. However, Britain has enjoyed an increase in exports over the same period, while its public finances have also improved — as reflected in the Spring Address by the Chancellor of the Exchequer Philip Hammond.
In this light, investor confidence of the British currency and the broader economy has also improved — despite the recent political events, including the second failure of Prime Minister Theresa May’s Brexit deal in the Commons.
“It should give the government a strong mandate to agree with the EU (on Brexit),” Esther Reichelt of Commerzbank said. “But in the end, the Parliament might not like the conditions attached to a delay by the EU”.
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The British pound has also strengthened against the common currency — rising to £0.8493 per 1 euro, or 1.6 percent year-to-date increase. The cable is now the best-performing currency amid its G-10 peers — in which light hardline Brexiteers in the British Parliament have urged the government to defy calls against a ‘no-deal’ Brexit.
For its part, the Canadian dollar rose sharply at the beginning of this year, despite US tariffs on Canadian steel and aluminium still being intact.
The Canadian economy grew 1.8 per cent in 2018 compared to a 3.0-per cent expansion the previous year — yet, investors believe the ongoing gains in oil production, as well as steady growth in Canada’s manufacturing sector, could result in quicker GDP expansion this year.
The Bank of Canada has kept its base borrowing costs at 1.75 percent earlier this month, despite calls for higher interest rates amid strong macroeconomic fundamentals. The central bank’s governor Stephen Poloz said interest rates could go up to the range of 2.5-3.5 percent, however, he noted, there’s too much uncertainty and international headwinds to take hurried steps towards that goal.
He said high levels of household indebtedness, uncertainty over business investment, as well as trade with the US, could render central bank policies more dovish.
“Given these uncertainties, we have kept interest rates unchanged at 1.75 per cent since last October,” Poloz said. “But with that rate still lower than inflation, it is clear that monetary policy continues to deliver a stimulus to the economy today”.
Meanwhile, job growth in Canada has improved over the past few months — topping 55,000 new jobs over four out of the last six months. In this light, experts don’t believe the Bank of Canada would cut interest rates — which could weigh on the loonie’s FX rate. Quite the opposite, economists say, if rates go up, and the broader economy gain momentum, the Canadian dollar will strengthen as well.
Even though Canada’s GDP growth slowed last year, economists say most recent data suggest the Canadian economy will likely gain momentum this year.
“The jobs data throws into question whether it is really that serious of a soft patch”, Greg Anderson of New York-based BMO Capital Markets said.
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Despite the lingering economic uncertainty in both the UK and Canada, their respective currencies are thus widely expected to blast ahead, quite possibly leading gains among the top-ten advanced economy currencies.
For Canada, the future implementation of the USMCA trade accord is of utmost importance, while the UK must finally get out of the EU, experts believe. Additionally, Brexit could ultimately mean deeper trading relations between the UK and Canada, as Westminster has repeatedly stated it would seek free trade deals outside of the EU once the divorce process is complete.