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The Bank of Canada turned somewhat more optimistic in the most recent rate decision and the optimism helped lift the loonie.

This comes despite falling oil prices, a key export for Canada. What’s next for CAD? The team at Credit Agricole explains:

Here is their view, courtesy of eFXnews:

CAD is leading gains in the G10 overnight after the BoC kept it policy rate on hold at 1.0%. The statement provided the marginal boost to CAD as the BoC painted an upbeat picture of the Canadian economy. For instance, it noted that, “Canada’s economy is showing signs of a broadening recovery.” In their view this is driven by stronger exports and increased business investment – both a reflection of the strengthening US economy.

What’s more, the BoC also noted that given the net effect of the recent developments, the output gap appears to be smaller than the Bank had recently projected. These are welcome signs from the BoC and they helped lift CAD as the market anticipates a less neutral policy bias in 2015. The market is now pricing in 25bp worth of hikes in the policy rate over the next year.

However, the language on inflation was a bit murky. It noted that inflation has risen more than projected in the October Monetary Policy Report but focused on the temporary nature of the price increases to downplay the inflationary outlook. Even so, we think the decline in the output gap should place wages on a more stable footing in 2015. For CAD, we think the combination of a more upbeat BoC and stable oil prices suggest scope for mild rally over the coming weeks.
Indeed, we think the “oil” links to CAD are a bit exaggerated given Canada’s oil exports account for only 5% of GDP. Oil related investment in Canada’s also accounts for a little less than 5% of GDP. In the G10 we think NOK is a much better oil proxy given oil exports account for a much larger share of GDP (18%). As such, we look for tactical decline in USD/CAD over the coming weeks and target a move back to 1.1222.

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