USD/CAD: Loonie Falls for Second Straight Day on Subdued Oil Prices

The Canadian dollar slipped against its U.S. counterpart for the second straight day on Friday as the firm greenback and falling energy prices weighed on the commodity currency.

The dollar to loonie conversion today rose to 1.2607 against the U.S. currency, up from Thursday’s close of 1.2564. 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 1.6% so far this month.

“The CAD has outperformed on the week and is the leading G10 currency by modest margin against the USD overall. That is largely a function of the CAD’s strong rebound from the five-month low it reached Monday, however. The USD remains generally overvalued against its major currency peers, our modeling work suggests, and USD/CAD’s overvaluation, which has been evident in our work for some time, remains intact,” noted Shaun Osborne, Chief FX Strategist at Scotiabank.

“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.”

Canada is the world’s fourth-largest exporter of oil, edged lower after witnessing a volatile week. U.S. West Texas Intermediate (WTI) crude futures traded lower by 0.18 cents, or 0.25%, to $71.72 a barrel.

The dollar index, a measurement of the dollar’s value relative to six foreign currencies, was trading 0.16% higher at 92.973 – not far from this year’s high of 93.437.

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.”

On the macro front, Canada’s June retail sales data dropped 2.1% in May, however, it was better than the expectations of a 3% decline.