Will USD/CAD Fall to New 2 Year Lows on Bank of Canada?

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Will USD/CAD Fall to New 2 Year Lows on Bank of Canada Announcement?

Daily FX Market Roundup December 8, 2020

Will USD/CAD fall to fresh 2.5 year lows on the heels of the Bank of Canada monetary policy announcement? Probably not.

Unlike the European Central Bank who is widely expected to ease monetary policy, no action is expected is from the BoC. The central bank left monetary policy unchanged when they last met in October and at the time, they said the 2020 contraction will be smaller than previously forecast but growth in 2021 will be weaker. Now in December, there are legitimate concerns about growth. Lockdowns have been imposed throughout the country as new coronavirus cases hit record highs. On Monday, more than 7800 cases were reported, well above the May peak of 2760. Restrictions were announced early last month and in Toronto, the country’s most populous region, they will last until December 21st.

Yet, Canada’s economic reports have been good with companies continuing to add jobs at a healthy rate, retail sales and inflation rising. Most of these numbers were from the fall however and if Monday’s softer manufacturing PMI report is any gauge we will soon see more effects of the lockdown. There’s relief in sight with Canada slated to get its first vaccine shipments next week. Taking all of this into consideration, the Bank of Canada will have to decide if their optimistic tone is warranted. With very little new data to justify altering their views, we are not looking for any major changes in the central bank’s outlook on Wednesday.

A glimmer of hope in Brexit talks and the start of a giant vaccine rollout in the UK should have driven sterling higher but instead, GBP/USD fell for the third day in a row. Early this morning, EU Commission VP Sefcovic said he has reached an agreement in principle on all Withdrawal agreement issues with UK Senior Minister Michael Gove ahead of Prime Minister Johnson and EC President von der Leyen’s in person dinner on Wednesday evening. The UK has dropped the clauses that conflict with the Withdrawal Agreement from their internal market and finance bills in good faith and hopefully progress will be made later tomorrow. Based on sterling’s price action, investors are cautiously optimistic about an end of year agreement.

Euro is finally weakening ahead of Thursday’s big monetary policy announcement. The losses are modest though with the pair off less than a cent from 2.5 year highs despite 3 day decline. The single currency has been remarkably resilient, thanks in part to stronger data. According to the ZEW survey, German investors are more downbeat about current conditions but upbeat about the next 6 months. It will be interesting to see how all of that factors into the ECB’s outlook because if they upgrade any part of their future economic projections, we could see further gains for the euro. Lastly, the US dollar rebounded against most of the major currencies with sterling and the Canadian dollars leading the slide. There was no US data but the clock is ticking for a government funding bill and assistance for as many as 12 million Americans at risk of losing their unemployment benefits the day after Christmas.

Kathy Lien
Managing Director

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