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  • USD/CAD continues to trade below 1.2700 despite jawboning from the governor of the BoC.
  • The pair was pressured by USD weakness amid renewed hopes for a US fiscal stimulus agreement.

USD/CAD is consolidating just beneath the 1.2700 level, despite some seemingly dovish remarks from the Governor of the Bank of Canada over the last few hours. The cross closed FX trade on Tuesday with losses of more than 0.5% or 65 pips and fell below the 1.2700 level for the first time since April 2018.

CAD shrugs of Macklem’s jawboning

CAD appears to have shrugged off a more dovish tone from the Bank of Canada’s Governor Tiff Macklem, who gave a speech at 19:30GMT on Tuesday followed by a press conference from 20:15GMT.

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.

Macklem also 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”.

As noted, his jawboning failed to dent CAD sentiment much. Indeed, FX markets were more focused on selling USD in favour of its more risk sensitive peers (like CAD) on Tuesday amid hopes that a US fiscal stimulus deal is getting closer. In terms of the latest on that front, talks between key Congressional leaders just wrapped up, but will restart again in a few hours. Republican House Minority Leader McCarthy said “there was progress”.

It seems that the BoC is becoming increasingly uncomfortable with CAD at current valuations and is well aware that CAD may continue to appreciate versus USD in the current environment. 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.

Looking ahead for the loonie, the main data points to watch for the remainder of the week will be November Consumer Price Inflation data will be released at 13:30GMT on Wednesday, followed by November Retail Sales data alongside November New House Price Index data at 13:30GMT on Friday. Otherwise, CAD traders are likely to remain focused on global risk appetite dynamics as well as crude oil markets.