USD/CAD: Loonie Extends Gains on Higher Oil Prices

The Canadian dollar extended gains against its U.S. counterpart, strengthening to a nearly two-week high on Monday as rising oil prices due to supply concerns supported the commodity currency.

The USD/CAD pair fell to 1.2606 today, down from Friday’s close of 1.2652. The Canadian dollar lost over 1.2% last month and further depreciated over 0.3% so far this month.

Canada is the world’s fourth-largest exporter of oil, which edge higher on supply concerns. U.S. West Texas Intermediate (WTI) crude futures were trading 1.99% higher at $75.43 a barrel. Higher oil prices lead to higher U.S. dollar earnings for Canadian exporters, resulting in an increased value of the loonie.

“The loonie has been on a solid appreciation path after Monday’s risk sell-off, benefitting both from the rally in oil prices and from some unwinding of political risk premium after Canada’s Federal vote. On the latter, while the election sent Canadian politics back to the status-quo (a minority Liberal government), markets appeared to look at the positives: pressures from Trudeau’s closest allies – the left-wing NDP – to extend fiscal stimulus are surely endorsing the Bank of Canada’s policy normalisation plans,” noted Francesco Pesole, FX Strategist at ING.

“The risks related to this political equilibrium are not absent, and mainly entail stronger opposition to pipeline projects and likely higher taxation to banks. Those, however, are factors that may emerge only later along the way.”

The dollar index, which measures the value of the dollar against six foreign currencies, was trading 0.06% higher at 93.382.  In Monday’s session, the dollar climbed for a second straight day, bolstered by a rise in Treasury yields ahead of this week’s series of Federal Reserve speakers.

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.

“A potentially “hawkish” FOMC plus concerns over resolution of the US debt ceiling that creates a macro risk-off event could combine to deliver some near-term tactical gains in DXY,” noted analysts at Citi.

“Ultimately, such gains should be faded as – (1) pace of any Fed taper is likely gradual and the Fed, ECB, BoJ, PBoC support risk sentiment well into 2022; and (2) any potential government shutdown beyond September 30th is likely to be temporary. A 91.28 – 93.44 range in DXY remains the base case though FOMC/potential government shutdown could briefly take DXY above the March 2021 high at 93.44 towards 94.50.”