The Canadian dollar remains rangebound (up just 0.2% this morning) against USD. While there is not yet any clear direction or trend to the USD/CAD exchange rate, there are some emerging risks on the horizon that suggest that the next big directional move for the Loonie might be down. First, stock markets are trading at record levels and by some measures are at risk of a correction. Such a correction in stocks would push up the US dollar and pressure the Canadian dollar. Second, the latest round of economic and corporate data suggests that the US economy is recovering as expected. With the additional stimulus to be injected by the Biden administration, the chances of the Federal Reserve pulling back some of its interventions in the next few months is increasing. That would also be bullish for the US dollar. Third, the Bank of Canada has been getting louder about the negative impact of a strong Canadian dollar. In light of those concerns, while the Bank did indicate a willingness to reduce asset purchases at its last meeting, it is unlikely to do so before the Fed moves. The Bank of Canada trailing the Fed in tapering its response to the pandemic would also hurt the Canadian dollar. So, the Canadian dollar is looking for direction as some of the major themes that had been moving markets previously have been priced into markets. While it is too early to have any conviction, there are some reasons to believe the next big directional move for CAD might be down rather than up.
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