Sterling has made gains against the Canadian Dollar during the early part of the trading week, hitting a high of 1.7456 against the Loonie overnight.
The CAD has found some support around this level but with some positive UK economic data this morning, in the form of Public Sector Net Borrowing figures, the Pound has managed to hold its market position around 1.74.
This positive trend for Sterling is harder to dissect, due to the overall strength of both the UK and Canadian economies. With the Canadian seemingly outperforming that of its UK counterpart over recent months, why are we seeing the Canadian Dollar lose value?
Yes, the Canadian economy is heavily reliant on the export of its crude oil (Canada is one of the globe’s largest exporters of this commodity), so recent fluctuations in its value can certainly have a knock-on effect. However, looking at market perception around the UK economy it is hard to understand why the Pound has pushed on as significantly as it has.
One of the catalysts for this week’s movement could be a report yesterday by the former Conservative Treasury Minister, Lord Jim O’Neill. Despite being a vigorous Remain campaigner, he argued that Britain “should prepare for a much more economically optimistically 2018”, citing better than predicted global growth as the reason.
He believes that Britain’s growth forecasts will be upgraded, due to China, the US and Europe showing increased economic activity. Whilst this view is unlikely to be shared by all, the Pound seems to have benefited as a result.
NAFTA causing Canadian Dollar weakness
However, the underlying reason for the current devaluation of the CAD probably lies with the current concerns surrounding the terms of the North American Free Trade Agreement (NAFTA).
US President Donald Trump has previously taken to Twitter to voice his concerns with the current terms, feeling they do not benefit the US as much as they should. He has already threatened to pull out of the agreement, which if it were to happen would be extremely detrimental to the Canadian economy. Canada’s primary importers are the US, so any shift in this trade relationship will likely have a negative knock on effect for the Canadian economy and ultimately the CAD.
We are in the NAFTA (worst trade deal ever made) renegotiation process with Mexico & Canada.Both being very difficult,may have to terminate?
— Donald J. Trump (@realDonaldTrump) August 27, 2017
Whilst Trump may struggle to convince Congress to pass any decision to leave NAFTA, the current uncertainty is weighing heavily on investors and as such the Canadian Dollar is struggling to make an impact against the major currencies, including the Pound.
However, the current trend could be reversed at any time and considering the relative health of the Canadian economy, I would be tempted to remove the on-going risk factor and secure any short-term GBP/CAD positions whilst rates continue to trade above 1.70.