Canadian dollar treads water ahead of BoC message

USD/CAD consolidated in a narrow 50-point range for the second week, after more expansive movements of December.

Canadian dollar was strengthened well in the last days of the year in a remarkable correlation with rising oil prices. Before the escalation of Iran-USA conflict in the first days of 2020, when oil prices gapped for the most expensive January levels, the Loonie was trading near 1.2950 against US dollar. But, as soon as oil futures came to more appropriate price area US dollar immediately climbed higher, lifting USD/CAD to 1.31.

Loonie might be one of the currencies to watch closely today, especially after 16:00 CET when Bank of Canada is scheduled to distribute its interest rate statement along with a monetary policy report, followed by a press conference at 17:15 CET.

According to Reuters data, the market consensus for today's BoC decision is to keep its target for the overnight rate unchanged at 1.75% where it remains since Oct. 24, 2018. Weak economic data in Canada reported last months could prompt Canadian central bank to reveal some signs of easing in its monetary policy.

If such a scenario would take place, the Canadian dollar may have at least a short-term downtrend towards Christmas resistance levels of approximately 1.3180. If no clear message from BoC will be made USD/CAD could further perform an attempt to slide to 1.2950 or even lower. Remember that BoC is the only central bank among developed economies that decided to raise the interest rates in 2017-2018 in four consequent steps with +0.25% upgrade at a time (from 0.75% up to 1.75%). Those moves allowed to perform solid USD/CAD selling strategies, especially in summer 2018, when the prices of USD/CAD plummeted from 1.38 to near 1.20.

The Bank of Canada decisions usually depend on international trade balance, PMI, labor market data and inflation figures that are always a key indicator for BoC. Canada's December CPI (Consumer price index) and annual CPI figures to be published at 14.30 CET today. Consensus forecast expected by Bloomberg survey is +2.2% for YoY calculations or the same as in November 2019, and +0.1% for MoM CPI data. The less is the inflation, the bigger could be a probability of softer central bank policy. In that case the Loonie could fall under pressure.

The Bank of Canada noted in its previous monetary policy statement released Dec. 4, 2019 that there is a 'nascent evidence' of the global economy stabilizing with growth potentially still expected to edge higher over the next couple of years, and 'waning recession concerns'. They also referred to ongoing trade conflicts and 'related uncertainty' that surely quieted since then. BoC also mentioned commodity prices as 'relatively stable' at the moment. On the positive side the Canadian regulator outlined stronger wage growth and investment spending, strong housing investment. On the negative side slowing down GDP in Canada in 3Q2019, the risks of financial vulnerabilities.

BoC December statement helped the Canadian currency to strengthen, but a series of mixed data published since provides an opportunity for BoC governing council to update changed their view.

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