Following the Bank of Canada's policy announcement, the CAD has given up some of its early-week gains, owing to some consolidation in oil prices below $75 and increased concerns over the Omicron variant, which has dragged risk sentiment lower.
While the BoC's prognosis for the CAD was positive, it fell short of expectations that guidance would become more hawkish; in actuality, market pricing for rate rises in early 2022 was far too aggressive. Despite the fact that the policy announcement stated that full capacity would not be reached until the middle of the year, market pricing continues to reflect a strong possibility of an earlier interest rate increase.
The current environment and BoC expectations vis-à-vis the Fed suggest that the USD/CAD could climb as high as 1.20 in H2 2022. That said, most believe the CAD to remain in the 1.25/1.28 levels through the remainder of the year. With its revised estimates, the BoC’s late January policy decision could signal that rate hikes will begin in the spring. This would be consistent with CAD seasonal statistics, which show that the CAD has a strong tendency to recover in February/April.
The calendar for the coming week is light, with little noteworthy information on either Monday or Friday. The Fed releases its latest policy statement on Wednesday, and Chairman Powell has his usual news conference. Of course, no change in policy is expected, but rising inflation and a tight labor market suggest the Fed may speed its tapering and raise rates sooner rather than later, notwithstanding the disappointing NFP report last week. Governor Macklem of the Bank of Canada is scheduled to speak at noon on Wednesday, just before the Fed's decision.
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