Canadian Optimism Drives USD/CAD Movement

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Canadian Optimism Drives USD/CAD Movement

The USD/CAD saw significant movement last week in a reflection of the ongoing optimism of the Bank of Canada as the coronavirus pandemic continues to bite.

Positive Expectation

Last Wednesday, the Bank of Canada left their policy unchanged at their regular meeting.

There had been little expectation of change in the 0.25% lending rate or the roughly C$4 million of quantitative easing (QE) that the Bank is pumping into the economy every week, though there had been some media speculation that the Bank might opt for a slight reduction in light of recent weak jobs numbers.

But one unforeseen development, at a time when a huge chunk of the Canadian economy is effectively locked down, was the level of optimism from the Bank on the potential impact on growth of the coronavirus vaccine.

Positive speculation about an improving second half of the year led to the USD/CAD being driven down to 1.2643 by the end of Wednesday.

Confidence

The Bank of Canada website headline said that the Bank would be holding to current rates until their inflation target had been achieved.

But the text of the announcement struck an optimistic note, speaking of the governing council’s ‘confidence’ in the size of the recovery and the impact of this confidence on QE. The statement implied that the reduction in QE could happen alongside an increase in growth during the third or possibly second quarter of the year.

Following the announcement, the USD/CAD continued to show up strong on Thursday, dropping to 1.2590, representing the strongest level for the Canadian dollar in nearly three years, though the plunge had been reversed to 1.2632 by the end of the day.

The reversal reflects the opinion of the forex market that the Bank’s Governor Tiff Macklem would be unlikely to seek a rise in the Canadian dollar by cutting QE before the US Federal Reserve, even should the Canadian economy start to show signs of significant growth by the summer.

Signs on the economy still remain mixed. Retail sales in November showed up at 1.3%, which was much better than the 0.1% that had been forecast, but there was little market impact as the Canadian economy returned to a partial lockdown last month.