USD/CAD back above 1.2900, but US stimulus success eases loonie woes

• USD/CAD is back above 1.2900 again amid a firmer US dollar.
• CAD is outperforming most of its other G10 counterparts on Tuesday, however, likely boosted by US fiscal stimulus optimism.

USD/CAD has moved back to the north of the 1.2900, just above which it is currently stabilising, amid a broad strengthening in the US dollar that has seen the Dollar Index (DXY) move to the north of the 90.70 level in recent trade, driven primarily by a safe-haven bid amid concerns regarding the new mutant Covid-19 strain in the UK, as well as ongoing Brexit angst. The pair currently trades higher by about 0.4% or just over 50 pips, though CAD is actually one of the best performing currencies vs the strengthening US dollar on Tuesday.

US stimulus success eases CAD’s woes

Tuesday ought to have been a rough day for the loonie and to some extent, it has, with USD/CAD crossing above the 1.2900 level for only the second time since early December (after Monday’s sharp rally to above 1.2950). This time, the move above the 1.2900 handle has a more sustainable feel to it and test of Monday’s 1.2950 highs feels likely.

But as noted, CAD is actually one of the best performing G10 currencies on the day on Tuesday. Confirmation overnight that the US Congress had agreed on and voted in favour of a $900B stimulus package is likely to be doing the loonie more favours than other G10 currencies, given the Canadian economy’s greater exposure to a US market that is about to get a nice government-funded juicing. The ink has barely dried on US President Donald Trump’s signature on the new legislation, but loonie bulls may already be betting on a more favourable outlook for the Canadian economy in Q1 2021 which they might hope dissuades an increasingly dovish sounding BoC against easing its monetary policy setting any further (such as an interest rate cut to 0.1% from 0.25%).

In terms of the week ahead; the Canadian dollar is likely to pay close attention to October MoM GDP growth figures out at 13:30GMT on Wednesday and, to a lesser degree, November Building Permits numbers out at 13:30GMT on Christmas Eve (Thursday). But the main factors to consider will be global macro, i.e. pandemic updates (what happens with the new Covid-19 strain being detected in the UK) and Brexit and how the dollar reacts to these. CAD might well continue to outperform the likes of AUD and NZD in the afterglow of US stimulus, however.