USD/CAD: Loonie Gains After Trade Balance Swings to Surplus

The Canadian dollar strengthened against the U.S. counterpart on Thursday as the merchandise trade balance swung to a surplus in June and oil prices recovered on Middle East tensions.

Today, the dollar to loonie conversion fell to 1.2475, down from Wednesday’s close of 1.2534. The Canadian dollar had lost about 1% in July – the second biggest monthly drop since September 2020 and has weakened about 0.2% so far this month.

Canada is the world’s fourth-largest exporter of oil, which edged higher following tensions in the Middle East.  U.S. West Texas Intermediate (WTI) crude futures were trading 0.70% higher at $68.6 a barrel. High oil prices lead to higher U.S. dollar earnings for Canadian exporters, resulting in an increased value of the loonie.

“Following the BoC’s taper at the July meeting, our base case is for another tapering in October, with net-zero purchases by year-end and BoC to commence rate hikes in 2022. Both fundamentals and technicals, therefore, continue to support the “buy CAD on dips” sentiment not only versus USD but also against low yielders (EUR, JPY and CHF) and AUD (that continues to face extended lockdown risks), noted analysts at Citi.

“We remain positive on CAD, pointing to next support in USDCAD at the rising trend line currently standing at 1.2457 that looks likely to break.”

The most important data point will come on Friday when the Canadian government reports about the July employment data numbers for July.

The dollar index, a measurement of the dollar’s value relative to six foreign currencies, was trading 0.10% lower at 92.175 at the time of writing. Still, not far from this month’s low of 91.782.

The dollar’s gains versus a basket of currencies on Thursday were largely due to hawkish remarks from the US Federal Reserve which led markets to move forward with expectations of policy tightening.

Richard Clarida said Wednesday that policy conditions could be met for an interest rate hike by late 2022, putting a move in early 2023 on track. Reuters reported that he and three other Fed members also hinted at cutting back on bond-buying in the near future, depending on what happens with the labour market.

The risk that the world’s dominant reserve currency, the USD, recovery 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.

“Markets remain complacent about the prospects for Fed taper as they focus on Chair Powell’s emphasis on optionality and data dependency. This makes the next 2 months of US jobs and inflation data critical. Until then, the more sanguine Fed backdrop is likely to keep US bond yields subdued, lending support to risk/ high beta FX (Commodity Bloc, GBP and Asia EMFX) against USD and funders (EUR, JPY and CHF). Targeting the 91.91 – 92.0 support area in DXY, followed by a quadruple support range at 91.28-44, which is where the 55 and 200d MAs converge with the March 2021 low and the May 2021 high while major resistance is seen at the 93.44 level,” Citi added.