[cppene]

CAD has been among the strongest performing currencies over the past trading week, with USD/CAD moving to test support close to 1.0750. While CAD has repeatedly failed to sustain gains beyond this level in recent months, some believe the next leg lower from USD/CAD may be in store. With risks skewed in favor of a CAD-supportive outcome at this week’s BoC policy-setting meeting, the value is seen in maintaining long CAD positions - stay long CADJPY.

Alongside its commodity currency peers, CAD benefited from the stabilization in risk appetite late last week. In part this may come down to steadying in commodity prices and the moderate bounce in oil prices. Recent moves in CAD appear well correlated with those from oil. Other factors may have also played an important role in driving CAD higher.

There is some signal that investors are looking to rebuild long CAD exposure on dips now. The combination of still light positioning and positive fundamentals could prove powerful in supporting CAD.

This skews risk return in favor of longs approaching this week’s BoC meeting. While the market does not anticipate a change in interest rates at the meeting on Thursday, it is believed risks favor relatively ‘hawkish’ rhetoric in the accompanying statement.

Coupled with continued easing in financial conditions and the relatively benign global backdrop, this could see policymakers express greater confidence in the recovery even if they stop short of shifting the bias of risks away from lower inflation. This should see investors further question the likelihood that interest rates remain on hold for the duration of the Bank’s conditional commitment and could contribute to CAD-favorable widening in interest rate spreads.

USDCAD vs. Oil