USD/CAD: Loonie Extends Gains as Crude Oil Prices Jump to Multi-Year Highs

The Canadian dollar strengthened against its U.S. counterpart, hitting an 11-week high on Monday as rising crude oil prices due to an ongoing global energy crunch supported the commodity currency.

Canada is the world’s fourth-largest exporter of oil, which edged higher as the global energy crunch continues. At the time of writing, U.S. West Texas Intermediate (WTI) crude futures were trading 2.22% higher at $81.11 a barrel- the highest since late 2014.

As the economy recovers, gas and coal prices have also increased, driving oil demand higher and raising crude markets. Higher oil prices lead to higher U.S. dollar earnings for Canadian exporters, resulting in an increased value of the loonie.

Today, the USD/CAD fell to 1.2444, down from Friday’s close of 1.2469. The Canadian dollar gained about 2% so far this month after depreciating around 0.5% in September.

“CAD Strengthens with Strong Crude Oil and Widening Rate Differentials The CAD again led the majors for the week against the USD with a 1.5% gain as it continues to gather support from solid energy prices and generally improving rate differentials against all of the key currencies,” noted Shaun Osborne, Chief FX Strategist Scotiabank.

“With OPEC+ choosing to stick to its November supply increase plans, crude oil prices extended their rise for a fifth consecutive week with WTI crude inching just above $80/bbl mark—a level the benchmark had not touched since November 2014—as the energy markets imbalance continues and high natural gas prices prompt gas-to-oil switching in energy generation. Global equities also recovered some ground this week as the US Senate voted to extend the country’s debt limit to early-December and markets seemed relatively unfazed by financial troubles in China’s real estate sector.”

The dollar index, which measures the value of the dollar against six foreign currencies, was trading 0.08% higher at 94.142. The greenback has gained across most major currencies in the last few weeks as investors have become concerned the Fed may withdraw its economic support due to slow global growth and high inflation.

“There has been a little respite in the surge in energy prices. This story continues to play out in FX markets through two key channels: i) what it means for a country’s terms of trade – i.e. exporters vs. importers and ii) what central banks are prepared to do about high inflation. The dollar looks well-positioned here,” noted Francesco Pesole, FX Strategist at ING.

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.