USD/CAD: Loonie Falls Against U.S. Dollar; Investors Eye Fed Decision

The Canadian dollar weakened against its U.S. counterpart on Tuesday as investors moved to the safety of the U.S. dollar; however, it will likely remain volatile ahead of the Fed monetary policy decision on Wednesday.

Today’s dollar to loonie conversion rose to 1.2594 against the U.S. currency, up from Monday’s close of 1.254. The Canadian dollar had lost about 3% in June – posting the biggest monthly drop since March 2020, the early days of the pandemic, and weakened over 1.5% so far this month.

“With the BoC on track to end asset purchases by year-end, we continue to see CAD as a potential outperformer in G10 in the coming months. The more balanced positioning could also favour the recovery in CAD,” noted analysts at ING.

The dollar index, a measurement of the dollar’s value relative to six foreign currencies, was trading 0.3% lower at 92.373 – not far from this year’s high of 93.437.

The U.S. Federal Reserve is due to make an interest rate decision on Wednesday. Traders remain cautious ahead of the policy decision as any unexpected hawkish surprise would lift the greenback.

The world’s dominant reserve currency, the USD, is expected to rise further over the coming year, largely driven by the Fed’s expectation of two rate hikes in 2023. A strengthening dollar and growing risk that the Federal Reserve would tighten its monetary policy earlier than expected would push the USD to CAD pair higher.

“Attention turns to the July 28th FOMC meeting where we expect taper decisions to be discussed with a formal set of normalization plans released in the Minutes. Such a signal may lead to further moderate tactical gains in DXY to horizontal resistance at 92.85 and perhaps even to pivotal resistance at 93.44 before reversing as fundamentals remain USD negative,” noted analysts at Citibank.

“With the Fed still buying assets unabated, risk sentiment should remain relatively well supported, leading to relative resilience of risk/ high beta FX (Commodity Bloc, Asia EMFX – CNH, SGD and GBP) against low yielders (EUR, JPY, CHF). Overall, levels above 92.50 in DXY still look tough to sustain medium-term while the 90.5 – 91.0 area looks tough to break on the downside leading into the meeting.”

Canada is the world’s fourth-largest exporter of oil, edged lower on surging COVID-19 cases cast a shadow on demand. U.S. West Texas Intermediate (WTI) crude futures traded lower by 0.3 cents, or 0.40%, to $71.61 a barrel.

“The USD remains generally overvalued against its major currency peers, our modelling work suggests, and USD/CAD’s overvaluation, which has been evident in our work for some time, remains intact. This suggests that the USD should edge back somewhat in the near-to-medium term to reconnect with what remains a clearly CAD-supportive backdrop,” noted Shaun Osborne, Chief FX Strategist at Scotiabank.