USD/CAD continues to move sideways this week. In the Wednesday session, the pair is trading at 1.2447, down 0.14% on the day. On the release front, Canada releases Building Permits, a major construction indicator. The markets are braced for a decline of 0.7%. In the US, today’s key event is Import Prices, with an estimate of 0.4%.
The Canadian dollar made up some ground against the greenback in December, and the currency hasn’t missed a beat in January, with gains of 1.2% percent. Recent economic indicators have pointed upwards, led by excellent employment numbers. In December, the economy added 78.6 thousand jobs, defying experts who predicted a minuscule gain of 1.8 thousand. This release comes on the heels of a superb November release, when the economy added 79.5 thousand news jobs. The unemployment rate dropped to 5.7% in December, down from 5.9% a month earlier. Last week marked a third winning week for the rejuvenated Canadian dollar, and on Friday the currency hits its highest level against the US dollar since late September.
Another factor which has boosted the Canadian dollar has been the recent rise in oil, which has jumped 6.8% since mid-December. Geopolitical tensions have boosted oil prices, in particular tensions with North Korea and the recent civil unrest in Iran. Still, there is pressure on the Bank of Canada to raise its benchmark rate of 1.0%, which is lagging behind the Federal Reserve rate of between 1.25%-1.50%. With the Fed widely expected raise rates in January, the recent gains by the Canadian dollar could evaporate if the BoC doesn’t raise rates at its policy meeting on January 17. However, the BoC has voiced concerns about the Canadian economy, and as things stand, the BoC is not planning to raise rates. This could mean a rough ride for the Canadian currency next week.
Interest rates may be in the headlines, but another important parameter is the Federal Reserve’s balance sheet. As of this month, the Fed has started to shrink its massive balance sheet of $4.4 trillion. The balance sheet ballooned during the financial crisis of 2008-2009, and good times have allowed the Fed to begin trimming its portfolio. Incoming Fed Chair Jerome Powell, who takes over in February, has estimated that the balance sheet could drop to anywhere between $2.4 trillion to $2.9 trillion after several years of cuts. Fed policymakers have not indicated a magic number for the balance sheet, but the cuts indicate a vote of confidence in the US economy.
