USD/CAD down 25 pips to 1.2611 today
CIBC expected USD/CAD to rise to 1.30 this quarter and 1.32 in Q2 in a note after the BOC decision:
Markets were mulling over the possibility that the BoC would undertake a micro-cut of 10-15 bps in January with an eye towards dampening enthusiasm for further C$ appreciation. Instead, as we expected, the Bank opted to keep rates on hold, but nudged up their estimate for the economy's non-inflationary potential output, so as to avoid having a stronger growth outlook accelerate the timetable for rate hikes. Even so, the market is still pricing in BoC hikes ahead of the Fed, a scenario that isn't likely to materialize. Note that our forecast has the US output gap closing earlier than Canada's reflecting the latter's greater retrenchment in 2020.
At a future rate decision date, the BoC might try to reinforce its dovish stance, and signal it will hike later than the Fed, by announcing that it's adopting average inflation targeting for 2022 and beyond. That could see the C$ give back some of its recent gains, although given our revised forecast towards a bit more weakness for the greenback against other majors, our new targets show a smaller loonie depreciation ahead.
