The truck blockade will tilt risks toward softer growth but is unlikely to impact BoC policy
Last week, despite large fluctuations in yields, turbulent commodity prices, and persistent volatility in equities markets, the CAD managed to maintain a slight gain against the US dollar. While the Fed's policy was under scrutiny after the US CPI rose more than expected and Fed President Bullard said he wanted to see a rapid rise in the Fed funds target rate by July 1, BoC Gov. Macklem warned that a "significant shift" in monetary policy was needed to get domestic inflation back on track, indicating that the BoC will likely maintain a small lead over the Fed, with lift-off looking assured in Canada on March 2nd, two weeks before the FOMC. There continues to be significant speculation that the BoC and the Fed may increase rates by 50bps in March.
BoC policy likely to lift the loonie
The majority of analysts remain bullish on the CAD's potential, but the stock market's volatility has stymied the currency's near-term chances. The increased focus on the truck blockades impact will likely lead to lower Q1 GDP growth, which may drag on CAD sentiment this week. While the problem is on policymakers' minds, we doubt it will have an impact on BoC policy at this time. Seasonal patterns for the CAD are still negative for the first half of the year, but we continue to expect a combination of BoC policy tightening and generally firm commodity prices to strengthen the CAD broadly later this year.
The week ahead
The coming week will have more data than the previous week, with Canada delivering its December CPI and Retail Sales figures. A positive surprise in Canadian inflation will likely support emerging pricing around the bank's 50-basis-point hike in March. It's worth noting that Deputy Governor Lane of the Board of Governors talks in the middle of the week. The NY and Philly Fed surveys, as well as PPI and retail sales, provide a first look at February activity in the United States. The focus for markets will be on the FOMC minutes and comments from Fed policymakers made late in the week. The fact that Bullard, Mester, and Waller are all voting hawks on the FOMC this year may add fuel to the fire for a "big bang" start to the Fed's tightening cycle.
USD/CAD trading range for the week: 1.26 – 1.28.
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