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USD/CAD: Loonie Extends Gains After Crude Oil Hits Three-Year High

By:
Vivek Kumar
Published: Oct 5, 2021, 14:38 UTC

The Canadian dollar extended gains against its U.S. counterpart on Tuesday as oil prices hit a three-year high after the OPEC+ group maintained its current crude production policy.

USD/CAD

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The Canadian dollar extended gains against its U.S. counterpart on Tuesday as oil prices hit a three-year high after the OPEC+ group maintained its current crude production policy.

“Citi remains bullish on Brent crude for the next 6 months (Q4’21 and Q1’22) and coupled with BoC likely nearing its goal of absorbing 350k job gains that could trigger signalling of rate hikes as early as H1’2022 (a possibility yet to be priced into Canadian short rates), this potentially makes CAD the “buy of the quarter in Q4” vs FX funders (USD, JPY, CHF and EUR),” noted analysts at Citi.

USDCAD’s decline and weekly close below the 55w MA at 1.2679 with help from the evening star formation and below there, lies the 55d MA at 1.2608 followed by the 200d MA and a rising neckline of a potential head and shoulders formation at 1.2525-34.”

The USD/CAD fell to 1.2562, down from Monday’s 1.2587 today. However, the Canadian dollar lost over 1.2% in August and further depreciated over 0.5% last month.

Canada is the world’s fourth-largest exporter of oil, which edge higher as OPEC+ kept its crude oil output stagnant at the current pace. Benchmark U.S. crude prices were approaching 2014 peaks. As part of an agreement announced in July, the OPEC+ group agreed to increase output by 400,000 barrels per day (bpd) every month until at least April 2022.

At the time of writing, U.S. West Texas Intermediate (WTI) crude futures were trading 1.79% higher at $79 a barrel. Higher oil prices lead to higher U.S. dollar earnings for Canadian exporters, resulting in an increased value of the loonie.

The dollar index, which measures the value of the dollar against six foreign currencies, was trading 0.26% higher at 94.016. The greenback has gained last week as investors have become concerned the Fed may withdraw its economic support due to slow global growth and high inflation. Rising bond yields have contributed to the strengthening of the currency.

Investors remain cautious as they approach a key payroll report late this week that could provide a look at the next move of the Federal Reserve.

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.

“2 factors seem to drive a tactically stronger USD last week – (1) “mini US-exceptionalism” arising from the energy crunch in euro area, UK and China while US is unaffected; (2) Positioning ahead of the US debt ceiling deadline, causing a net shrinkage in USD liquidity available to the banking system,” Citi analysts added.

“This should reverse and weaken USD, but timing may be affected by debt ceiling concerns. DXY closes the week a tad above 94.00 after hitting a high of 94.50 earlier in the week but still below key resistance at 94.65-84 (55m MA, 200w MA, March 2020 low, Sep 2020 high) which has held in the recent past where gains have faded.”

About the Author

Vivek has over five years of experience in working for the financial market as a strategist and economist.

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