Pound Struggles, NAFTA weighed on the Loonie and Catalonia Still Hanging over the Euro

• Following a rise in UK inflation, the GBP struggled against the dollar, How would you sum up Sterling’s week and where do you see it going next?
  

It’s been a dire week for the Pound, with inflation’s rise to 3% doing little in terms of support with the new BoE Deputy Governor stating that he would not be voting for a rate hike next month.

Following the uptick in inflation, September wage growth figures disappointed with wage growth continuing to lag behind inflation, weighing on consumer spending.

The BoE is in a precarious position, with rising household debt and soft wage growth raising concerns over the BoE being able to lift rates next month.

The outlook for the Pound certainly doesn’t look positive, particularly following September retail sales figures on Thursday, which were a clear reflection of the issues that the BoE and the UK economy are facing at present.

We could see some support for the Pound next month, should UK Chancellor of the Exchequer Hammond surprise the markets with the November budget, particularly should there be any tax benefits and more for the youth to boost confidence and spending.

For now, however, the direction will likely be hinged on sentiment towards Brexit with the EU Brexit Summit concluding today, though as we have seen on multiple occasions, we can expect the EU to look to strong arm the British government in negotiations which will likely be a negative for the Pound.

• CAD gained against the USD this week, following positive manufacturing data. However, with a NAFTA set-back, what do you predict will be the effect on this pair?
  

We’ve seen the market be particularly sensitive to noise over NAFTA, which has weighed on the Loonie, especially with the continued delays, with talks now scheduled to resume next month and are not expected to end until the 1^st quarter of next year.

While the markets continue to respond negatively to progress on NAFTA, one does also need to consider that some of the negativity may be more to do with Mexico than Canada and I would expect much of the issues with NAFTA to be priced in for now.

On the positive side, macroeconomic data out of Canada has been impressive as we saw with the latest PMI numbers released this week, with today’s retail sales and inflation figures also of particular importance ahead of the BoC monetary policy decision next week.

We’ve seen oil prices on the rise, with Brent sitting at around $58 levels which is Loonie positive and a hawkish BoC will certainly continue to provide support for the Canadian Dollar over the near-term.
So we can expect the markets to continue buying in on the dips as talks on NAFTA progress, with further gains in the Loonie likely based on the macroeconomic outlook and sentiment towards monetary policy.

• With troubles in Catalonia still hanging over the Euro, it reached a three day high yesterday, do you see this trend continuing?

There were a number of factors that have provided support for the EUR this week, including concerns over China and growth prospects which led to an easing in risk appetite. With the EUR being a funding currency bouts of risk aversion tends to lead to gains in the EUR.

That being said, market sentiment towards the issues in Spain remain mixed, particularly when considering the fact that the issues are isolated to Spain and not beyond the Spanish borders. Granted that Catalonia accounts for 20% of Spain’s GDP and with Spain being the Eurozone’s 4^th largest economy, that’s a sizeable piece of the Eurozone’s economic outlook when considering that the Spanish government had revised down growth projections for next year.

A further negative for the EUR would be if the Spanish government goes ahead and invokes Article 155 this weekend, which would remove certain powers of the Catalonian government. Thereafter it will depend on whether there is unrest and whether it spreads beyond Spain’s borders.

We’ve got the ECB monetary policy decision next week and with the markets have already responded to the disappointing plans for the asset purchasing program for next year, Draghi could surprise with a bigger cut in monthly purchases.

On the flip side, progress on U.S tax reforms could return appetite for the Dollar should the U.S President finally be able to deliver on one of his campaign promises.