Cdn dollar extends rally ahead of BoC

The Canadian dollar continues to head higher this week. In the North American session. USD/CAD is trading at 1.2654, down 0.78% on the day.

Bank of Canada expected to remain cautious

What can we expect from the Bank of Canada policy decision on Wednesday? The bank will likely maintain current policy, which has been accommodative. We can expect the bank to maintain the benchmark rate of 0.25% and to announce that it will continue to reinvest assets as they mature. The bank ended its QE scheme in October, so the focus is currently on the timing of an interest hike. There is a disconnect between market expectations and BoC guidance – the markets are projecting a rate hike in the first quarter, while the BoC is looking at mid-2022.

There are plenty of factors supporting a rate hike. As in the US, inflation has been re-hot and is at its highest level in 30 years. Inflation has pushed above 3%, the upper limit of the bank’s inflation band, and BoC Governor Tiff Macklem has acknowledged that inflation has been more persistent and higher than expected. The labor market is strong, and the November job report came in at 153 thousand, crushing the consensus of 37 thousand. As well, the unemployment rate fell to 6.0%, down sharply from 6.7% and beating the forecast of 6.6%.

The main argument against any tightening in policy is the Omicron variant of Covid. It remains unclear just how much of a threat Omicron is, but fears of a new wave of Covid spooked the markets in late November. Although investors have calmed down, there is concern in the air and any reports of a spike in infections could quickly send the markets south. We will know more about Omicron in a few weeks but in the meantime, the BoC will likely play it safe and avoid any surprises. This should make for an uneventful meeting with minimal impact on the Canadian dollar.

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 USD/CAD Technical

• USD/CAD continues to fall and break below support levels. The pair is testing support at 1.2666. Below, there is support at 1.2618
• There is resistance at 1.2758 and 1.2898

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