Credit Agricole is long USD/CAD. Where to target

"The CAD has recouped its post-BoC losses. Markets were probably encouraged by President Trump's approval of the Keystone XL oil pipeline, previously blocked by President Barack Obama on environmental concerns.

However, we do not see this as an immediate negative for USD/CAD: although this would facilitate the delivery of oil from Western Canada to US refineries in several years' time, the immediate impact will mostly be via increased US hiring during the construction of the project. Markets were also likely to have been encouraged by the relatively constructive tone from Prime Minister Justin Trudeau and other Canadian politicians with respect to potentially re-negotiating the NAFTA terms, suggesting that the close US-Canada trade relationship will most likely largely survive the protectionist leanings of the new US administration.

However, from a valuation perspective, the CAD is starting to look expensive again, as oil prices remain in their current USD51-55/bl range and 2Y rate differentials with the US continue to widen.

We expect USD/CAD to rise to 1.37 by the end of Q1 and 1.40 by Q3.

In the week ahead, we are watching the November GDP report. BoC Governor Stephen Poloz speaks on Tuesday, 31 January, when he gets a chance to clarify his comment at the press conference that a rate cut remains "on the table".