USD/CAD: Rising BoC’s optimism, modest CAD gains – HSBC

On 20 January 2021, the Bank of Canada (BoC) left its key indicators of monetary policy unchanged, with extraordinary support to remain in place, for now, it seemed more confident in medium-term recovery. Economists at HSBC believe the CAD will strengthen against the USD this year, but it is expected to underperform other “risk-on” currencies, such as the AUD and NZD.

Key quotes

“The BoC said that the Canadian economic outlook was then ‘stronger and more secure’ than at the time of the last forecast in October 2020. The BoC also projected GDP growth of 4.0% in 2021 (vs. 4.2% in October), and 4.8% in 2022, up from 3.7%. The BoC is yhus beginning to focus on conditions that might lead to a reduction in monetary stimulus, rather than that might result in additional stimulus.”

“We believe that the CAD can capitalise on the market’s expectation for a global economic upswing, fostered by accommodative policy settings and disbursement of a COVID-19 vaccine. This is already feeding into a more buoyant oil market and while the gain in prices may not be enough to spur a sudden acceleration in energy sector business investment in Canada, higher oil prices should remain supportive for the loonie.”

“We look for modest CAD gains against a weaker USD in 2021. However, we expect the CAD to underperform other “risk-on” currencies such as the AUD and NZD, reflecting the country’s economic scaring, high debt levels, and associated constraints on the policy room for manoeuvre.”