E The Case For The Canadian Dollar Remains Strong From Good Economic News

While the U.S. inaugurated its 46th President, the Bank of Canada attended to more mundane matters. The Bank of Canada released its latest Monetary Policy Report (MPR) and along the way delivered some good news for the Canadian economy. For a brief moment, the news was good enough to drive USD/CAD, the U.S. dollar versus the Canadian dollar (FXC), back to levels last seen April, 2018. 

The Canadian dollar has steadily recovered against the U.S. dollar since the March collapse in global stock markets (USD/CAD).
The Canadian dollar has steadily recovered against the U.S. dollar since the March collapse in global stock markets (USD/CAD). Source: TradingView.com

 

Despite a negative forecast for Q1 GDP growth, Bank of Canada Governor Tiff Macklem revealed an upgrade for 2021 and 2022 GDP growth: 4% and 5% respectively. The Bank of Canada sees beyond the current lockdown-driven slowdown to a coronavirus vaccine launch that puts Canada 6 months ahead of schedule on its road to protecting its citizens. Overall, Canada has managed the pandemic much better than the U.S. The case rates alone can help explain the relative strength for the Canadian dollar using USD/CAD. Currently, Canada's approximate 200 coronavirus cases per million people is a mere quarter of the soaring case rate in the U.S.

Daily new COVID-19 cases per million people, 7-day moving average
Daily new COVID-19 cases per million people, 7-day moving average. Sources: United Nations via Haver Analytics, World Health Organization and Bank of Canada calculations

 

Still, the Bank of Canada remains very cautious. Surely the desire to keep monetary policy highly accommodative clamps down on enthusiasm.

“…there is clear reason to be more optimistic about the direction of the economy over medium term. But we are not there yet. The resurgence in COVID-19 cases weighs heavily on the near-term economic outlook. And this underlines the ongoing need for extraordinary fiscal and monetary policies.”

The strength of the Canadian dollar is also a drag on the outlook. However, Macklem acknowledged the Bank of Canada can do little about the relative strength. He pointed to a general sell-off in the U.S. dollar as a key driver. From the very end of the Monetary Policy Report:

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Disclosure: short USD/CAD

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