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USD/CAD rose above 1.26 following the Bank of Canada’s monetary policy announcement. The pair probably would have extended its rally to 1.27 if not for the price of oil, which climbed to a fresh 3.5 year high after crude stocks took an unexpected tumble. Despite all of the improvements in Canada’s economy, Bank of Canada Governor Poloz and Deputy Governor Wilkins did not feel that underlying issues are evolving well enough to send an unambiguously positive signal to the market. The tone of their press conference was cautious with Poloz saying the economy is not yet able to stay at full capacity on its own and therefore interest rates may need to remain below the neutral range. They also see companies hesitant to invest because of NAFTA risks. As a result, the BoC feels they need to be data dependent and the pace of rate hikes is a considerable question mark as headwinds prevent a full recovery. Trade protectionism remains the biggest risk for Canada and they expressed no excitement about the recent progress in NAFTA talks.
Given how much USD/CAD has fallen ahead of the rate decision, we believe their lack of optimism will lead to additional short covering that should take USD/CAD to at least 1.2680 if not all the way to 1.2750. Technically, the next key resistance for USD/CAD is between 1.2685-1.2700, where the February 9th swing high meets the 50% Fibonacci retracement of the January to March rally and the next big figure.