USDCAD price action was very muted during the first-half of the London session. With little in the way of key Canadian data today, we expect this to remain the case for at least the 1H of the North American session. Systematic accounts are still holding on to a moderate level of CAD shorts. The unwinding of those positions continues to pose a year-end downside risk to USDCAD. But we are expecting that downside to remain very limited to start the week as the FOMC decision approaches. US data today in the form of Empire Manufacturing (Dec.) and industrial output (Nov.) are expected to show decent improvement. We must also remember that USDCAD is a very important pair for the Fed taper. BoC and Fed policy will be diverging somewhat as the Fed tapers, and the sensitivity of USDCAD to key CAD-USD rate spreads has increased this year. If the Fed tapers this week, the 5-year CAD-USD swap spread could potentially test the 50bps mark. This would be supportive for USDCAD. For now, these factors should see decent bids emerge in the 1.0550-1.0560 range.
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BMO