Oil and Fed driving the loonie

A more expansive fiscal stance has started in Canada, with the approval of a tax cut for the middle class, starting on January 1. The federal budget for fiscal year 2016-17, which should be presented to Parliament in Q1 2016, will give markets clarity about the size and pace of the promised additional spending in infrastructure. If successful, the plan would support investment and reduce pressures for the BoC to ease.

This week should be choppy for the loonie, as oil prices and the market's anticipation and reaction to the well-telegraphed Fed hike will likely dominate price action. 

"As a hedge against USD volatility we recommend long CADMXN based on the historically high correlation between CAD and MXN, coupled with our out-of-consensus call for no hike in Mexico", notes Barclays. 

In terms of data, inflation will be the focus, as CPI is released on Friday.