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  • USD/CAD has slipped from the 1.2600 level and is now testing its 21DMA close to 1.2570.
  • Stronger than expected January GDP growth is helping the loonie to outperform in the G10.

USD/CAD was choppy in the lead up to the final 4pm London fix of Q1 2021 dropping sharply from close to the 1.2600 level to under the 1.2550 mark, before then reverting sharply back to trade close to 1.2570. The drop saw the pair briefly slip below its 21-day moving average, which currently sits at 1.2568, and the pair is now testing this level. On the session, USD/CAD trades lower by about 50 pips or roughly 0.4%.

Driving the day

As noted, pre-4pm London fix volatility was the main driver of the recent drop from the 1.2600 level. For reference, the 4pm London fix is a 2-minute time period starting from 16:00BST (or GMT) when financial institutions and big market players cross the world take an average value of the major exchange rates and then use this average to value their global portfolios. As a result, the time window can be subject to market manipulation, as traders seek to push exchange rates one way or the other, perhaps with the aim of inflating the value of their global portfolio at the last second. The last fix of the quarter is a particularly important London fix, given that large financial institutions often refer to the change in the value of their portfolio over quarterly time periods.

Generally speaking, the loonie has been able to benefit from broad USD weakness on Wednesday. Markets are in a broadly upbeat mood ahead of US President Joe Biden’s infrastructure bill announcement at 21:20BST, with US stocks, crude oil markets and other commodities mostly trading on the front foot, weighing on safe-haven currencies USD, CHF and JPY. Meanwhile, US government bond yields are subdued, removing another source of impetus for the dollar.

Strong Canadian GDP

But the loonie appears also to be deriving some traction from stronger than expected January GDP data; the Canadian economy grew at a MoM pace of 0.7% in January, above expectations for a pace of growth of 0.5%. The data was better than StatsCan’s flash estimate released a month ago, with the Canadian economy doing well despite strict Covid-19 containment measures that were in place throughout the month. StatsCan’s flash estimate for February was for a MoM growth rate of 0.5%, as Covid-19 restrictions were eased.

RBC caution that a third wave of Covid-19 is once again threatening the economic recovery but note that “another downturn in economic activity looks less likely given the economy was able to grow (relatively solidly) through the second wave”. “Meanwhile”, continues the Canadian bank, “vaccine distribution is also escalating with Canada now expecting to receive around 44 million doses of vaccines by the end of June – enough to cover the more vulnerable age groups (above 60) with 2 shots and the rest above 16 with one”. Following the strong data, the loonie is one of the best-performing currencies in the G10 on the day.