Canadian Dollar and Pound Make Unprecedented Gains

The Canadian dollar rose to a 30-year high following a report that showed retail sales in May having increased at the fastest rate in almost ten years. Retail sales rose 2.8 percent in May, up from the .2 percent increase in April. This news prompted investors to speculate interest rate hikes by the Canadian central bank, which is what caused the spike in the Canadian dollar. The currency rose to 96.39 U.S. cents this morning in Toronto from 95.52 at yesterday’s close.

Today’s high has marked a 12 percent gain this year alone. David Watt, senior currency strategist at RBC Capital Market in Toronto, states the retail report suggests a very strong underlying demand in the economy. He expects interest rate hikes by the central bank in September. Another factor helping the Canadian dollar gain is the price of crude oil jumping to $74.12 a barrel this morning. Half of Canada’s commodities exports is crude oil. On July 10th the Bank of Canada raised the benchmark lending rate to 4.5 percent by a quarter percentage point. But also stated a further increase is likely to be needed. The central bank will meet again on August 5th.

Similarly to the Canadian dollar, the pound rose to a 26-year high against the U.S. dollar on speculation that the BOE will raise interest rates to cool a booming economy. The Bank of England’s biggest worry is inflation. Unable to the tame the economy to its below target inflation level of 2 percent, BOE Deputy Governor John Gieve has strongly suggested that interest rates will be raised. Michael Klawitter, currency analyst at Dresdner Kleinwort in Frankfurt, speculates the BOE to be hawkish and increase rates to 6.25 percent. The pound rose to $2.0643 today from yesterday’s close of $2.0593.

Currency Outlook and Strategy:

According to a Bloomberg article, the number of wagers on an advance on the pound has outnumbered bearish investors the most since October 1993. This indicates an overall bullish sentiment that could push the pound even higher against the dollar. Kathy Lien, chief currency strategist at FXCM, indicates that the GBP/USD will further increase only if foreign investments continue to flood into the U.K. economy. She has reasoned that the lack of U.K. protectionism and resulting influx of foreign investments has been the root cause of the strengthening pound. Last week, Chancellor Angela Merkel stated her intentions of restricting foreign investments into Germany. This may redirect flow from Germany to the U.K. In turn, there will be reason for the pound to gain even further.

On the technical side, technical currency analyst Jamie Saettele at FXCM states that even though the GBP/USD is overbought, as seen by the high RSI of 80.92, there is still room for an upward trend. (See full article) Time Shea, currency analyst at FXCM, puts a different spin on things with: "Everyone talks about housing in the USA, and how that's preventing The Fed from raising. We'll see more data on that this week. But look at the UK. House prices are still rising by 10% a year. That rate of growth has held for about 2 years now, despite 5 rate hikes. The housing dynamic is very important for both the GBP and the USD right now, but the story on the different sides of the pond couldn't be more different." The conclusion is: expect interest rate increase by the Bank of England.




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