Monetary policy rules CAD and CAD rules monetary policy - Rabobank

"Outside of the notable event risk this week, our CAD Market Model currently suggests a fair value of 1.2080 at present although it shows a target of 1.219 for the weekend," Christian Lawrence, Senior Market Strategist at Rabobank, notes.

Key quotes:

"Looking at the pair heading into month-end, we mentioned the importance of retail sales and CPI inflation data on Friday but of course Canada’s neighbor to the South will have a key role to play in FX price action as well. The FOMC will announce its latest monetary policy decision tomorrow and release its new Summary of Economic Projections and a new DOT plot going out to 2020. Our Fed watcher, Philip Marey, sent out a preview for that meeting. To summarize, we expect the Fed to announce the start of its balance sheet normalization program but we do not expect them to raise rates and we do not expect them to do so later in the year either. That said, USD is arguably more sensitive to the political environment than Fed policy at the moment and in this respect, tax reform remains the key to currency performance and poses a significant risk to USD crosses."

USD/CAD this week

"We must reiterate that this is purely based on our forecast for input variable prices and it does not incorporate any view on the FOMC or Canadian data releases."

"In terms of technicals, a look to our Rabo Daily Momentum Model shows a “short” signal remains in place with the directional movement index and proper order of exponential moving averages driving that signal. Given the point made earlier about the importance of BoC monetary policy for CAD at the moment, it should come as no surprise that short term correlations (one month and three month) between WTI oil and USD/CAD have slipped into statistically insignificant territory. In line with this, the correlation with the three month OIS spread between USD and CAD has risen over the past few weeks. It is also worth noting that Canadian equity returns have shown a closer relationship with USD/CAD of late which is a factor we have recently incorporated in our monthend rebalancing model."

"Initial support for USD/CAD is likely at 1.2111 before 1.2062 comes into play. Focus will then turn to the 1.20 handle. On the upside, 1.2338 will be the key hurdle to jump if the pair is to have a run at 1.24."