This Wednesday the Bank of Canada (BoC) meets for its regular monetary policy meeting. The UBS team don't expect it to change its policy stance, but after an almost 10% surge in the Canadian against the US dollar since its last meeting, they do expect the BoC to push against this recent currency strength. Key Quotes “Despite our longer-term positive view on the CAD, we caution that short-term weakness could be around the corner, and we reiterate our three-month forecast of USD/CAD 1.40.” “The Canadian dollar in the last few years has moved from being highly overvalued against the USD, at around parity, to highly undervalued at close to 1.50. The BoC supported a large part of this latter move by means of monetary policy decisions and communication, believing that a weaker currency would buffer the domestic economy from global tensions and the low oil price. But with USD/CAD spiking from the beginning of December to mid-January from 1.32 to 1.47,BoC Governor Stephen Poloz cautioned at the January monetary policy committee meeting that too much currency depreciation might do more harm than good. This was in line with our view that levels much above 1.40 could be regarded as overshooting.” “Since then global risk-sentiment has recovered, financial market conditions have eased and oil prices have risen more than 30%. But USD/CAD has also dropped by almost 10%, as markets started pricing out BoC easing. In our base case, we consider further BoC rate cuts unlikely, but we think that it is uncomfortable with the CAD rebound and will try to verbally push USD/CAD back toward 1.40. Clients strongly exposed to the CAD should be aware that a short-term move higher is likely in our view before the medium-term recovery continues.” For more information, read our latest forex news.