- USD / CAD has fallen back to 1.2850 from earlier above 1.2900 amid a weaker USD.
- Recent news that a Brexit deal is near has given a boost to risk appetite and gave the loonie a boost.
USD weakness and a strong recovery in market risk appetite, as reports coming out of the UK indicate that a Brexit deal is near, has put USD / CAD under pressure and sent the pair below 1.2850, after it already crossed below 1.2900 during the Asia Pacific session on Wednesday. Strong crude oil prices, which have seen WTI gain roughly $ 1 and climb back above the $ 48.00 level, is also helping the loonie, while October’s GDP figures have gone unnoticed. Currently, the USD / CAD is trading down about 60 pips or about 0.5% on the day.
Canada sees solid GDP growth in October
Canadian economic growth in October marginally exceeded expectations, with the economy growing at a 0.4% month-on-month rate versus expectations for a 0.3% growth rate. The growth rate still moderated significantly since September, during which time the economy grew at 0.8% month-on-month.
While the data is encouraging, the fact that it is already quite out of date probably explains why loonie traders ignored it. In fact, since October, Covid-19 cases have increased in Canada and lockdown restrictions have tightened. The same can be said of Canada’s most important trading partner, the United States. Therefore, an economic slowdown is likely towards the end of the year.
However, with the US fiscal stimulus about to be agreed (the only barrier now is Trump signing it before the end of the year), this should give the US economy a solid boost in January. 2021, which should translate into a better one in early 2021 in Canada as well. The mass vaccinations already underway north of the border are also likely to boost confidence and growth in the coming months.
It goes without saying that the CAD is much more focused on the themes that will influence growth in the coming months than it was on growth last month.
One might assume that the same could be said of the Bank of Canada. However, the recent dovish rhetoric from the bank makes it appear that they are beginning to worry about the depreciation rate of the USD / CAD and the damage this could cause to the competitiveness of Canadian exports. Indeed, despite the positives noted above that are likely to help the Canadian economy perform in the coming months, the BoC has been talking about the possibility that it could ease monetary policy further (like the RBA previously, which cut rates to 0.1% from 0.25% and increased the size of its QE program).
If the bank continues down this route, it is likely that it can only leave a temporary dent in the strength of the CAD, given that 2021 fundamentals still favor further appreciation.
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