So far in 2021, the US dollar has traded in an unusually wide 2 penny range against the Canadian dollar; as high as 1.283 and as low 1.263. The US dollar is currently trading near the end of that range. That is, there has been a lot of volatility without any real directional movement. The price action is indicative of the fact that the USD/CAD is looking for direction, as we have been arguing for several weeks. By that we mean to say that the major known uncertainties have already either passed (US election, Brexit) or are already priced in (the end of the pandemic in the third quarter in most developing countries). In fact, the Canadian dollar is trading near the Interchange Financial Consensus Short Term forecast which amalgamates a number of different exchange rate forecasts. Barring unforeseen circumstances, what the market will be looking at now is how effectively economies around the world reopen and how central banks and governments react to developments. At this point we expect the Loonie to react mostly to two types of developments. First, any uptick in global sentiment or greater risk appetite will move the Loonie up (and vice versa). For example, if the vaccination programs around the world proceed faster than expected then expected the Canadian dollar to gain. In this regard, we believe that the Canadian dollar will continue to be correlated to stock markets which also reflect risk sentiment. Second, the Loonie will become more sensitive than it has been in the last few months to domestic developments such as Bank of Canada movements, economic indicators, and fiscal policy adjustments. On the domestic front, the risk of a potential Spring election is also on the radar.
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