Viraj Patel, Foreign Exchange Strategist at ING, arguments that monetary policy expectations in Canada and the US is likely to favor the upside in the USD/CAD. Key Quotes: “The BoC also stated that recent CAD strength has been a result of the rebound in oil prices and narrowing Fed-BoC policy expectations. Our short-term USD/CAD financial model corroborates this story, with our estimates showing that the pair should currently be trading in the 1.3450-1.3500 area.” “We remain cautious over chasing any further USD/CAD downside for two reasons. First, BoC rate cut expectations are being underestimated and we think there is a strong chance that the central bank cuts rates again in April when the new projections are released. Second, commodity FX outperformance is usually the initial reaction to a positive shift in the risk environment; we would expect this to give way to a hawkish Fed repricing should risk-on sentiment persist” “Hence, the relative Fed-BoC policy expectations channel is likely to work against the loonie over the coming months and with the outlook for oil prices still uncertain, we prefer to remain long USD/CAD and retain our 1M forecast of 1.40.” For more information, read our latest forex news.