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  • USD/CAD is consolidating close to highs of the day as attention turns to Wednesday’s FOMC monetary policy announcement at 19:00GMT.
  • The loonie is the underperforming G10 currency as traders digest dovish remarks from the BoC Governor Macklem last night.

USD/CAD is consolidating just above the 1.2750 level and only a few pips below highs of the day at 1.2765 as the loonie continues to underperform its G10 peers ahead of the Wednesday FOMC meeting following dovish comments from the governor of the Bank of Canada on Tuesday. At present, the pair trades with gains of around 0.5% or 60 pips.

Delayed loonie downside following dovish BoC speak

It took a few hours for markets to digest dovish commentary from BoC Governor Tiff Macklem on Tuesday evening, but in a delayed reaction, market participants finally decided to sell the loonie and USD/CAD has been on an upwards trajectory for the most part since the midpoint of Wednesday’s Asia Pacific session.

On the near-term outlook for the economy, Macklem said that economic recovery is at a very difficult stage as, in the near term, rising Covid-19 infections will dampen growth. Moreover, while the chance of a negative GDP number in Q4 is less than it was in October, Q1 2021 GDP could go negative. However, Macklem did note that the arrival of vaccines is tremendously positive and “we are going to get out of this”. Macklem also reiterated what BoC Deputy Governor Beaudry said last week about the possibility that interest rates could be lowered, although the bar to go into negative territory is high.

Moreover, Macklem directly noted recent CAD appreciation as a drag on the Canadian economy; CAD appreciation is hurting the competitiveness of Canadian exporters in the US market, he said, before noting that CAD appreciation “significant” and “material” and is “on our radar screen”.

Markets seem to have realised, albeit in a somewhat delayed fashion, that the BoC is becoming increasingly uncomfortable with CAD at current valuations. With the bank already touting a possible move lower in interest rates (perhaps to 0.1% from 0.25%, ala the RBA and BoE), further monetary easing motivated by a desire to reduce the rate of CAD appreciation is becoming more likely. Wednesday’s underperformance in the loonie seemingly thus represents traders upping their bets for further BoC easing over the coming months.

Loonie ignores Canadian CPI amid pre-FOMC tentativeness

Canadian Consumer Price Inflation data for November was released earlier on in the session; the YoY rate of CPI growth eclipsed expectations, rising to 1.0% in November from 0.7% in October versus expectations for 0.8%.

TD Securities notes that “the strong performance reflected a combination of factors, including a strong tailwind from homeowner replacement costs (+1.1%) which saw their second-largest increase of the last 15 years”. Moreover, continues the bank, “today’s data leaves Q4 CPI tracking near 0.8% y/y – well above the Bank of Canada’s projection (0.2%) from the October MPR, although the Bank will be willing to look through this given elevated uncertainty around the second wave of COVID.”

The loonie has thus looked through this data as the focus turns to the FOMC monetary policy announcement at 19:00GMT. The bank is expected to hold fire on interest rate, but may provide some guidance regarding the duration of its asset purchase programme, or even tweak the composition of this programme. However, analysts note that given that Congress seems on the cusp of agreeing on fiscal aid, the bank has the room to hold fire on any policy changes and opt for patience.