By Sam Coventry

The Canadian dollar (CAD) has powered higher on the 3rd of February on news that XL pipeline is one step nearer to getting OK'd.

However, while the Canadian dollar has seen some strength on the back of the XL pipeline news, questions as to just how supportive it is to the CAD remain.

A look at the key CAD rates in late afternoon in London show:

The pound sterling to Canadian dollar exchange rate is 1.25 pct in the red at 1.8068.The euro to Canadian dollar exchange rate is 0.51 pct lower at 1.4932.The US dollar to Canadian dollar exchange rate is 0.66 pct lower at 1.1054.Be Aware: All CAD quotes are taken from the inter-bank markets. Your bank will deliver your currency after levying a spread on the rate. However, an independent FX provider will guarantee you a more competitive spread, thus delivering up to 5% more currency. Please learn more here.

Pound sterling sent packing

The outlook for the pound to Canadian dollar exchange rate has deteriorated somewhat, the longer term uptrend could be called into question should the sell-off extend much further and sustain a break below 1.10.

The Canadian dollar was driven higher on Friday as CAD short positioning was covered and the markets got wind of the release of the US State Department’s review of the environmental impact of the XL pipeline proposal.

"The report raised no significant objections to the project—similar to last August’s report, however, and a consultation period now follows. It remains to be seen how quickly a definitive US position on the pipeline emerges but developments can be viewed as a modest plus for the CAD," notes Shaun Osborne at TD Securities, "progress on XL is a positive for the CAD but is does nothing to alter the recent drivers of CAD weakness—softer domestic data, low inflation in particular and the BoC leaning dovish."

BoC shocks, Canadian dollar predicted to consolidate vs USD

Are we in for a period of consolidation in the headline dollar / Canadian dollar rate?

Greg Anderson at BMO Capital thinks so:

"We did not think the BoC’s ‘dovishness’ was flagrant enough to warrant the spike above 1.115 in USDCAD we actually observed during the week just ended.

"However, the spike is important for the week ahead because of what the main driving force likely was. We suspect that it was ‘shock’. What the spike probably indicated is that a large number of players didn’t actually believe the BoC would turn up the dial at all this week. The bulk of CAD selling and option-related buying in spot was essentially driven by the BoC’s ‘element of surprise’. Importantly, this is a tactic that the BoC still has on its side. Rallies in the CAD should therefore be pretty contained within most ranges.

"We look for general consolidation in the week ahead within a 1.100-1.115 range, as relative strength and momentum indicators stabilise. We think the market is probably a bit fatigued after a very tense week in USDCAD, meaning that there is really no huge desire to push the pair aggressively in either direction."