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USD/CAD surges to key level ahead of Bank of Canada decision

On Monday, USD/CAD rose to key resistance around the 1.2650 level, an important previous turning point for the currency pair that was last reached in late August. Last week, USD/CAD broke out above a major downtrend line extending back to the early May highs. Since September, the pair has been climbing in a sharp rebound as the US dollar has begun a recovery driven by hawkish expectations for both US monetary and fiscal policy. This Wednesday brings the next policy and interest rate decision from the Bank of Canada (BoC). Though no rate changes are expected at that time, the Canadian dollar will likely be impacted by the tone of the central bank with respect to its monetary policy trajectory going forward.

The BoC raised interest rates back-to-back in July and September, helping to fuel and extend a Canadian dollar rally and USD/CAD downtrend within the third quarter of this year. Starting in early September, however, as the battered US dollar began to rebound from multi-year lows, the Canadian dollar lost ground against the greenback.

Recent signs have been pointing to the likelihood that the BoC may become more dovish than it was during the summer. Bank of Canada Governor Stephen Poloz stated recently that the central bank would be data-dependent and that monetary policy changes could surprise in either direction. Late last week, key Canadian inflation and retail sales data were released that were significantly lower than expected. This weak data clearly does not bode well for further near-term policy tightening by the data-dependent BoC. As a result, Friday saw the Canadian dollar fall sharply, which was exacerbated by a US dollar surge. Pressure on the Canadian dollar and support for USD/CAD are likely to continue if the BoC indeed strikes a dovish tone on Wednesday, and especially if the US dollar and hawkish Fed expectations both remain supported as they have been.

With any further USD/CAD breakout above current resistance, key target levels to the upside can be projected around the 1.2800 and then 1.3000 resistance areas.

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