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Canadian Dollar in Holding Pattern Ahead of US Payrolls Report

USD/CAD has edged higher in the Friday session. Currently, the pair is trading at 1.3150. On the release front, there are no Canadian releases on the calendar. In the US, the focus is on employment numbers, led by Nonfarm Payrolls. The indicator is expected to jump to 170 thousand. At the same time, wage growth is forecast to edge down to 0.3%. Any unexpected readings from either of these key indicators could lead to volatility in the North American session.

There were no surprises from the Federal Reserve, but the markets still came away disappointed, which put pressure on the dollar. As expected, the Fed opted to maintain the benchmark interest rate at 0.50%. The markets were hoping for some hints about monetary policy from the rate statement, but the statement was more dovish than investors would have liked. The statement reiterated that the US economy is in good shape and that inflation continues to move towards the Fed’s target of 2 percent. Analysts expect the Fed to raise rates two or three times in 2017, with the odds of a rate hike by June priced in at 70%. However, the post-election euphoria which sent the markets higher appears to have dissipated, as Trump’s economic policy remains unclear, while his rhetoric remains controversial and undiplomatic. Trump has promised substantial fiscal spending and tax cuts, but hasn’t provided any details. Just a few months ago, a red-hot US economy had led to the Fed loudly hinting at gradual rate increases in 2017. However, with the markets showing increasing uneasiness about the new Trump administration, the Fed will likely change gears and adopt a wait-and-see attitude in the coming months, watching what bills Trump is able to get through Congress and how the economy responds.

The Canadian dollar has raced out of the gates in 2017, gaining 2.8% in the month of January. Earlier this week, USD/CAD dropped to 1.2965, the pair’s lowest level since September 5. Will the Canadian dollar rally continue in February? There was positive news about the Canadian economy on Tuesday, with the release of Canadian GDP. The economy expanded 0.4% in November, rebounding from a 0.3% decline in October. This figure beat the forecast of 0.3%, and the Canadian dollar moved higher. However, there could be trouble ahead for the Canadian economy, which is heavily reliant on its southern neighbor. A report by the National Bank Financial Markets says that if Donald Trump’s administration implements protectionist policies, Canada’s GDP could drop as much as 1.5 percent. Trump has declared he will renegotiate the NAFTA trade agreement, which could have negative repercussions for the Canadian economy. With 70% of Canadian exports headed for the US, any protectionist moves by Trump could unnerve the markets and send the Canadian dollar lower.

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