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After an initial uptick to the 1.3120 regions, the USD/CAD pair met with some fresh supply and has now reversed Friday’s up-move to five-week tops. With investors looking past weaker Canadian inflation and retail sales data, a subdued US Dollar price-action failed to assist the pair to build on its momentum beyond the 1.3100 handles. Deteriorating US-Saudi relations, following the disappearance of journalist Jamal Khashoggi, coupled with a mildly softer tone around the US Treasury bond yields kept the USD bulls on the defensive at the start of a new trading week.

As of writing this article, the USDCAD pair is trading at 1.3083 down by 0.16% on the day. Adding to this, some renewed pickup in crude oil prices underpinned demand for the commodity-linked currency – Lonnie and further collaborated to the pair’s modest retracement through the early European session on Monday.

USD is Likely To Gain Upper Hand Shortly After BOC Update As Forward Guidance Looks Dovish

Despite a modest pull-back, the pair has managed to hold its neck above 100-day SMA, which has been acting as a key hurdle over the past one month or so and hence, it would be prudent to wait for a strong follow-through selling before confirming that the pair might have topped out in the near-term. In absence of any major market moving economic releases, the pair remains at the mercy of broader market sentiment surrounding the buck and oil price dynamics ahead of this week’s key event risk – the latest BOC monetary policy update on Wednesday.

The Bank of Canada meeting (Wed) will be the highlight of the week; the central bank is likely to continue its gradual tightening path and provide a 25 basis point rate hike. This should be no surprise, as headline inflation has been out of the BOC’s comfort zone for some time now, hitting what it sees as its upper threshold of 3% YoY in July. And with all three of the main core measures floating around the 2% target, there is little reason for the BOC to hold off on pushing policy rates higher.

Market expectations have marginally cooled over recent weeks (now only 78% priced in versus 95% at the start of the month). A follow-through of a hike should give CAD a knee-jerk boost; however, with a 100bp of tightening already priced in over a 2-year horizon, we think there’s limited scope for a sustained rally in CAD – unless the BOC send an ultra-hawkish signal. We see this as highly unlikely – with the fragile global market environment, uncertainty over global trade and mixed Canadian data of late (in particular weak wage growth) likely to see a more ‘dovish hike’ from the BOC.

We, therefore, wouldn’t be surprised to see USD/CAD snap back higher following an initial post-meeting fall. Immediate support is now pegged near the 1.3070-65 region (100-DMA), below which the pair is likely to accelerate the corrective slide towards 1.3030-25 support area en-route the key 1.30 psychological mark. On the flip side, the 1.3120-30 region now seems to have emerged as an immediate strong hurdle, which if cleared should assist the pair to aim towards reclaiming the 1.3200 round figure mark.

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