We have received a lot of pushback on our description of the USD/CAD exchange rate as “volatile” but “directionless” over the last couple of weeks, especially from USD bears who believe that the US currency will continue to weaken for the foreseeable future. But consider the trading in the last 24 hours. The Canadian dollar started out the morning as flat and then gained 0.6% over the course of the day and briefly even touched fresh multi-year highs. The move was ascribed to comments from Fed Chair Powell who forcefully described an environment of very low rates for the next many quarters, even after the pandemic ends. That message considerably weakened the US dollar across the board. Biden’s speech later in the evening, outlining a massive $1.3 trillion relief package further pressured the US dollar. Then in the overnight session, the USD gained all of those losses back and then some. The reasons for the reversal are not entirely clear but as we have been saying for days, a huge relief package in the US is a double edged sword for the Loonie. Yes, it will help global growth (which is good for CAD) but it will also potentially push the Fed to the side and put upwards pressure on yields (bad for CAD). There is one thing that is becoming more clear about the economic recovery. Both in Canada and the US, we are past the “easy” first phase where economic data points would consistently beat expectations. After yesterday’s poor jobs report in the US, December retail sales in the US also came in well below expectations.
