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The CAD is up slightly versus the USD so far this year, in contrast to most other majors, helped by a climb in crude prices alongside a less dovish Bank of Canada (BoC) announcement than expected. New targets of economists at CIBC Capital Markets show a smaller loonie depreciation ahead.

Key quotes

“Markets were mulling over the possibility that the BoC would undertake a micro-cut of 10-15 bps in January with an eye towards dampening enthusiasm for further C$ appreciation. Instead, as we expected, the Bank opted to keep rates on hold, but nudged up their estimate for the economy’s non-inflationary potential output, so as to avoid having a stronger growth outlook accelerate the timetable for rate hikes.”

“The market is still pricing in BoC hikes ahead of the Fed, a scenario that isn’t likely to materialize. Note that our forecast has the US output gap closing earlier than Canada’s reflecting the latter’s greater retrenchment in 2020.” 

“At a future rate decision date, the BoC might try to reinforce its dovish stance, and signal it will hike later than the Fed, by announcing that it’s adopting average inflation targeting for 2022 and beyond. That could see the C$ give back some of its recent gains.”

“Q1 2021: 1.30 | Q2 2021: 1.32”