CAD’s rally warrants caution

FX:USDCAD   U.S. Dollar / Canadian Dollar
The loonie was the star of the day on Friday, fuelled by a spectacular Canadian jobs report for December. Following November's 79,500 increase, jobs rose by 78,600, beating the modest market estimate of +2,000. It was the thirteenth consecutive month of employment growth. Moreover, the unemployment rate dropped by 0.2% to a record low of 5.7%.
The impressive figures sent USDCAD to new 3-month lows at 1.2354. The unexpectedly strong report made the market convulsively review the BoC rate hike expectations 2018. The market is now pricing around a 70% chance of a hike on Jan. 17, while before the release the odds were roughly 30%.
In this respect, there is a room for the loonie to continue its bullish move, especially on the back of USD’s general weakness. However, the current rally warrants some caution, as traders may be overestimating the BoC’s ambitions. The risks are the uncertainty around NAFTA and the potential impact of tighter domestic mortgage rules. These factors may prevent the central bank from hiking during the next meeting, which will be a disappointment for the CAD.
So far, the pair USDCAD struggles to make a meaningful recovery. The price is stuck around the 1.24 mark. In the short-term it needs to recover above 1.2480 area in order to alleviate immediate bearish pressure and regain the 1.25 hurdle.
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