USD/CAD: All Eyes on FOMC outcome, Loonie Maintains Range Play

The Canadian dollar largely remained range-bound in lacklustre trade against its U.S. counterpart on Wednesday as all eyes remain on the FOMC meeting, in which it is expected to announce the beginning of tapering its massive bond purchase program.

At the time of writing, the USD/CAD was trading in a range of 1.2401-1.2423. Still, the Canadian dollar gained about 2.3% last month after depreciating around 0.5% in September.

“FOMC may give USD a lift but we favour fading modest USDCAD gains. The CAD (ended the week) more or less unchanged on the USD which is a little surprising in the context of Wednesday’s hawkish Bank of Canada outcome and the violent sell-off in short-end rates which leaves Scotiabank’s aggressive forecast of 100bps of tightening in 2022 looking a bit conservative,” said Shaun Osborne, Chief FX Strategist at Scotiabank in its Oct 29 research note.

“A more hawkish sounding Fed could help. That may give the USD a mild fillip but we continue to see USDCAD gains capped around 1.25 (in line with our range estimator) and feel modest USD gains are a sell.  Our year-end target remains 1.22.  We favour fading USD gains.”

Investors have become concerned the Fed may withdraw its economic support due to slow global growth and high inflation, which will push the greenback further up. The Investors are already looking past the months-long process of scaling back the Fed’s $120 billion in monthly bond purchases, which is expected to be announced on Wednesday.

They are more concerned with when interest rates will be raised by the central bank, and have shifted forward their expectations for the first hike because of high inflation readings. The dollar index, which measures the value of the dollar against six foreign currencies, was trading 0.12% lower at 93.985.

Investors were concerned that increasing inflationary pressures could pose a headwind to the economy and affect how soon the Federal Reserve may be able to raise rates. Rising bond yields have contributed to the strengthening of the currency.

It is highly likely that the world’s dominant reserve currency, the USD, will rise by end of the year, largely due to the expectation of at least one rate hike next year. With the dollar strengthening and a possibility that the Federal Reserve will raise interest rates earlier than expected, the USD/CAD pair may experience a rise.

Canada is the world’s fourth-largest exporter of oil, which edged lower after API data shows U.S. inventory build-up. At the time of writing, U.S. West Texas Intermediate (WTI) crude was trading 2.17% lower at $82.08 a barrel. Lower oil prices lead to lower U.S. dollar earnings for Canadian exporters, resulting in a decreased value of the loonie.

“The October BoC meeting was the hawkish surprise. The BoC ended QE and entered the reinvestment phase at this meeting. Our base case is now for the first-rate hike at the April 2022 meeting. We continue to think subsequent rate hikes may be gradual, proceeding quarterly in July and October as the BoC may be cognizant of not moving too far ahead of the Fed,” noted analysts at Citi.

“USDCAD already had and continues to have a very clear head and shoulders top which suggests a move towards 1.20 can be seen. If USDCAD closes below 1.2350, it may complete a bearish outside day.”