CAD a laggard in major FX for DecemberBut still holding runner up spot for 2021May find feet in Jan as market eyes BoC

Image © Bank of Canada, Reproduced Under CC Licensing

The Canadian Dollar featured as a straggler among major currencies in December but remained one of the top performers for the year overall and could yet find its feet again in the new year as market attention shifts back to the Bank of Canada (BoC) policy outlook.

Canada’s Dollar lagged behind all major counterparts except the Swedish Krona and Japanese Yen in December when cooling its heels in the wake of what has otherwise been a strong performance for 2021, and even then it retained the runner up spot among G10 currencies for the year.

With December’s lethargy aside, the Canadian Dollar was outdone by only its U.S. counterpart in the G10 contingent this year while out in the wider market the Chinese Renminbi was the only other currency to get the better of the Loonie during the course of 2021.

“We're seeing some Canadian Dollar demand in recent sessions as risk appetite comes back and oil recovers, but overall, the Canadian Dollar is under pressure into year end, falling victim to diverging central bank policy,” says Joel Kruger, chief FX strategist at LMAX Exchange Group.

Enthusiasm for the Canadian Dollar ebbed noticeably in December after the Bank of Canada (BoC) left the currency market standing at the altar alone keeping its interest rate guidance unchanged despite widespread expectations of a ‘hawkish’ revision.

Above: Canadian Dollar performance against G10 counterparts for 2021. Source: Pound Sterling Live.

Reference rates at publication:

GBP to CAD spot: 1.7273High street bank rates (indicative): 1.6668 - 1.6789Payment specialist rates (indicative: 1.7118 - 1.7187Find out about specialist rates, hereSet up an exchange rate alert, hereMany analysts and investors had expected the BoC to provide early warning that an interest rate rise could be announced in its first 2022 monetary policy decision on January 26, although the bank passed up that opportunity.

“The broader risk mood should continue to call the shots over the next few days before the market’s attention fixates on the possibility of earlier BoC action, and thus CAD outperformance, ahead of its January 26 meeting—for which markets are pricing in a toss-up chance of a hike,” says Shaun Osborne, chief FX strategist at Scotiabank, writing in a Wednesday market commentary.

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December’s announcement merely reiterated the BoC’s earlier assessment that economic conditions and inflation pressures are unlikely to merit any change in the 0.25% cash rate until at least the second quarter of next year.

This month’s decision prompted the market to revise away earlier expectations for the BoC to begin lifting its interest rate in January but since then some Canadian economic data may have made January’s decision a closer call than it appeared to be earlier in December.

Above: Market expectations for BoC cash rate. Source: Goldman Sachs.

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“We continue to think that the BoC will revise down supply estimates in the January MPR and so liftoff, although this is a very close call over March/April,” says Daan Struyven, a senior economist at Goldman Sach, writing in review of the latest Canadian GDP data.

GDP data released just ahead of the festive holidays suggested that Canada’s economy grew stronger than was expected by the BoC during the final quarter while consumer price index figures showed inflation pressures building further in November.

When combined with the blockbuster employment report released ahead of December’s rate decision, these figures have helped paint a picture of an economy that appears to be increasingly achieving the milestones necessary for the BoC to become comfortable lifting interest rates.

This could mean there’s an enhanced risk of the BoC surprising the market in January with a decision to lift the cash rate back to 0.50%, which is no longer fully baked into financial market pricing and so would potentially have an uplifting effect on the Canadian Dollar in the early months of 2022.

Above: GBP/CAD rate and USD/CAD in 2021.