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#1 13-01-2021 11:18:40

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From: Paris - France
Registered: 21-12-2009
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CAD: what's next for Canada's dollar?

CAD: what's next for Canada's dollar?

Each quarter, the Bank of Canada (BOC) publishes a survey of business prospects for the Canadian economy. It covers such areas as business activity, investment and hiring plans, pressures on production capacity, and changes in wages, prices and inflation.

The report is highly regarded as the businesses selected to participate in the survey are handpicked based on their contribution to Canada's Gross Domestic Product (GDP). As a result, anyone interested in the future direction of the Canadian dollar (CAD) marks the economic calendar with the release date of the Business Outlook Survey.

Canada's economic recovery continues

The survey took place in mid-November and early December 2020, and the compiled results were presented this week. It shows that the economic recovery is continuing, albeit at a slower pace.

Optimism prevails as the government and businesses have the end of the pandemic in sight with the launch of the virus vaccine campaign. Indeed, although most companies have reported sales below pre-pandemic levels, businesses remain optimistic and expect higher sales in 2021 due to the recovery of economic activity.

The report also points out that inflation, as measured by the Consumer Price Index (CPI), is expected to remain below the BOC target of 2%. Despite the quantitative easing programme, inflationary pressures are expected to remain moderate in the next few months.

Pressure on input costs will, however, result in higher producer prices, but the process takes time and is highly dependent on the course of the virus and economic recovery. As a result, inflation is not a concern for the Bank of Canada, meaning that the central bank will maintain an accommodative monetary policy for a period of time before withdrawing some stimulus.

Overall, the report paints a balanced picture of the Canadian economy as it struggles to emerge from the pandemic. The strength of the CAD relative to the U.S. dollar observed in recent months is primarily due to the recent theme of reflation in financial markets calling for a lower USD. However, as the new administration prepares to take office in Washington, the reflation theme could change significantly.

The 1.29 level remains key for the USD/CAD pair, the most important CAD exchange rate. If the price moves back above this level, the CAD weakness will likely be triggered by the rising dollar rather than changes in Canadian economic activity and production.

"Anything worth having is worth going for - all the way." - J.R. Ewing



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