USD/CAD bounces at 1.2500 level ahead of BoC BOC survey release in thin, US holiday thinned trade

USD/CAD recently bounced at 1.2500, a level which coincides with the pair’s 200-day moving average, and is back to trading in the 1.2520s, though is still down about 0.2% on the day. That actually means that the Canadian dollar is the best performing G10 currency on the day, albeit by a slim margin, despite the slight pullback from highs in crude oil markets. The Bank of Canada will release its quarterly Business Outlook Survey (BOS) at 1530GMT, which will be viewed in the context of how likely the bank is to shift its interest rate guidance at the upcoming January 26 policy meeting to signal a potential rate hike in March.

FX markets may be tentatively buying the loonie in anticipation of a hawkish BOS, which may explain some of the current CAD outperformance. ING think that given “today’s survey may not fully mirror the worsening demand outlook as data was mostly collected before the Omicron crisis become severe… the survey’s explanatory power may be somewhat limited, but there are still a few points to keep an eye on”. These, the bank says, include “inflation expectations (and how many firms still believe high inflation is due to temporary factors), hiring intentions and CAPEX investment figures (which had been quite strong earlier in the year)”.

Market commentators may warn not to read too much into the very shallow price action on Monday given low volumes and thin liquidity as a result of US market closures for Martin Luthar King Jr Day. Things will get more interesting for the pair later in the week, with Canada December Consumer Price Inflation and Retail Sales data and US regional Fed manufacturing surveys for January set to be the most closely followed releases. ING suspect that “external factors” like oil prices are likely to continue to prove “supportive to the currency… we expect any rebound in USD/CAD to stall around the 1.2600 region this week”.