USD/CAD: Loonie to enjoy the combination of fiscal stimulus and a hawkish BoC drift – HSBC

The Bank of Canada announced that it would pare bond-buying, and expects the conditions for a rate hike to come earlier. The combination of a less dovish BoC and fiscal stimulus should be CAD positive over the near term, in the view of economists at HSBC. What’s more, they believe recovery setbacks in some nations are likely to be temporary, so the global upswing should support the loonie.

CAD is well placed to capitalise on the global economic upswing
“The BoC left its policy rate unchanged at 0.25%, while it announced that it will reduce its weekly net purchases of Government of Canada bonds to a target of CAD3 B a week. The BoC also upgraded its economic outlook, including an upward revision to its 2021 GDP growth forecast to 6.5%.”
“The more impactful revelation was the BoC’s guidance around the likely timing of a move on interest rates. Based on the BoC’s latest projections, economic slack will be absorbed with inflation sustainably at the 2% target in 2H22, rather than the previous guidance of ‘into 2023’.”

“On the fiscal front, Canada’s federal government is committed to stimulus even as the domestic economy is set to rebound strongly in 2H21. The recently released federal budget for 2021 included new spending measures totaling CAD101.4 B over the next three years.

“While the recovery in some nations has been delayed by fresh waves of COVID-19 and slower vaccine roll-out, these are likely to be temporary setbacks. A patient Federal Reserve (Fed) is also likely to see the USD weakening over the next few months, as market hawks are forced to dovishly recalibrate their expectations for the Fed. Overall, we expect the CAD to strengthen modestly against the USD over the next few months.”