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  • USD/CAD has dropped back to 1.2850 from previously above 1.2900 amid a weakening USD.
  • Recent news that a Brexit deal is close has given risk appetite and the likes of the loonie a boost.

USD weakness and a solid pick up in the market’s appetite for risk as reports coming out of the UK indicate that a Brexit deal is close at hand has put USD/CAD under pressure and sent the pair below the 1.2850 mark, after it already crossed below the 1.2900 level during Wednesday’s Asia Pacific session. Strength in crude oil prices, which has seen WTI gain roughly $1 and rise above the $48.00 level again is also helping the loonie, while October GDP numbers have largely gone under the radar. At present, USD/CAD is trading lower by about 60 pips or around 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 MoM pace of 0.4% versus expectations for a growth rate of 0.3%. The rate of growth still moderated significantly from September, during which time the economy grew at 0.8% MoM.

While the data is encouraging, the fact that it is already quite out of date likely explains why loonie traders ignored it. Indeed, since October, Covid-19 cases have risen in Canada and lockdown restrictions have been tightened. The same can be said for Canada’s most important trade partner, the US. So an economic slowdown is likely to come into the end of the year.

However, with US fiscal stimulus on the cusp of being agreed upon (the only barrier now is Trump signing it off before the year-end), this ought to give the US economy a solid boost in January 2021, which ought to translate into better early 2021 growth conditions in Canada as well. Mass vaccinations already underway north of the border are also likely to boost confidence and growth in the months ahead.

Needless to say, CAD is much more focused on the themes that will influence growth in the months ahead rather than on growth in the month’s past.

One might assume the same would be able to be said for the Bank of Canada. However, recent dovish rhetoric from the bank makes it seem though they are starting to worry about the rate of USD/CAD depreciation and the harm this might do to the competitiveness of Canadian exports. Indeed, despite the above-noted positives that are likely to aid the Canadian economy’s performance over the coming months, the BoC has been talking about the possibility it might ease monetary policy further (ala the RBA earlier, who cut rates to 0.1% from 0.25% and upped the size of their QE programme).

If the bank does continue down this route, they are likely to only be able to leave a temporary dent in CAD strength, given that the fundamentals going into 2021 still favour further appreciation.