USD/CAD: Loonie Falls For Second Straight Day, Hits Four-Week Low

The Canadian dollar slipped against its U.S. counterpart for the second straight day on Tuesday as currency traders moved to the safety of the greenback amid rising concerns that global economic activity is slowing, and the spread of the Delta COVID-19 variant will derail it further.

Today, the dollar to loonie conversion rose to 1.2633, up from Monday’s close of 1.2572. The Canadian dollar had lost about 1% in July – the second biggest monthly drop since September 2020 and has weakened about 1.2% so far this month.

“USDCAD remains range-bound. But the USD is pushing higher today, and short-term chart trends continue to edge a little more constructively for the USD. USDCAD has found good support in the upper 1.24s over the course of the past week, near the 40-day MA (1.2491), preventing a stronger CAD tone developing,” noted Shaun Osborne, Chief FX Strategist at Scotiabank.

“Now, intraday charts show the USD pushing higher to test resistance at 1.2585. This level has held a number of tests since late July and a push to new, even “minor”, highs should signal scope for more significant USD gains—potentially towards the upper 1.26s. The 1– and 6-hour DMI oscillators are aligned bullishly for the USD, echoing the bullish signal evident on the weekly study. The flat daily DMI may be an impediment to a clearly stronger USD tone developing for now but the USD looks in positive technical shape and poised to strengthen.”

The dollar index, a measurement of the dollar’s value relative to six foreign currencies, was trading 0.51% higher at 93.106 –not far from this year’s high of 93.437. In Tuesday’s session, the dollar gained for the second consecutive session, supported by safe-haven demand.

The greenback was also supported by hawkish remarks from the US Federal Reserve makers in the past which led markets to move forward with expectations of policy tightening. The Federal Reserve may move forward on tapering asset purchases and increase rates sooner if the inflation rate rises. This could effectively push the dollar up in value.

The risk that the world’s dominant reserve currency, the USD, rise over the coming year is high, 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.

Despite Justin Trudeau’s decision to call an early election, China’s slower economic growth weighed on sentiment. China’s economic indicators caused a surprise decline in global shares, as investors reacted to the spreading Delta COVID-19 variant. As a major exporter of commodities, including oil, Canada’s dollar tends to be sensitive to the outlook for global economic growth.

Canada is the world’s fourth-largest exporter of oil, which edged higher snaping some of the losses incurred during the Asian session. U.S. West Texas Intermediate (WTI) crude futures were trading over 0.30% higher at $67.43 a barrel. Higher oil prices lead to higher U.S. dollar earnings for Canadian exporters, resulting in an increased value of the loonie.