USD/CAD: Loonie Gains Against Broadly Weaker U.S. Dollar; Near-Term Prospects Remain Bleak

The Canadian dollar strengthened against the U.S. counterpart as the greenback slightly retreated as doubts grow that the Federal Reserve will tighten its monetary policy anytime soon.

Today, the dollar to loonie conversion fell to 1.2503, down from Thursday’s close of 1.2525. The Canadian dollar had lost about 1% in July – the second biggest monthly drop since September 2020 and has weakened about 0.3% so far this month.

Despite Justin Trudeau’s intentions of holding a snap election on Sept. 20, volatility did not increase-a trend that should not be unexpected given historical patterns.

“USDCAD started the week edging towards the upper reaches of the forecast range we outlined last Friday, as anticipated, but the USD is heading for a modest decline on the week overall as markets lack a strong sense of direction amid low summer volatility and turnover.  The decisive data point for the week—US CPI—came in around expectations, tempering USD gains,” noted Shaun Osborne, Chief FX Strategist at Scotiabank.

“But the tapering drumbeat from Federal Reserve policy is getting louder and more persistent it does appear and that perhaps focuses market attention a little more intently on the Jackson Hole Fed symposium at the end of the month for some clearer messaging on the policy outlook from Chairman Powell.”

The dollar index, a measurement of the dollar’s value relative to six foreign currencies, was trading 0.47% lower at 92.601 – still not far from this year’s high of 93.437.

The U.S. dollar weakened versus the basket of currencies after inflation increased at a slower pace in July. Inflation rose 0.5% last month after increasing 0.9% in June.

The Fed chair Jerome Powell has consistently called for more time, but more other officials are now stating their support for tapering bond-buying in the coming months.

However, 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.

Canada is the world’s fourth-largest exporter of oil, which edged lower on rising concern that the new delta variant will derail the global economic recovery, slowing the recovery of oil demand.

U.S. West Texas Intermediate (WTI) crude futures were trading 0.12% higher at $69.15 a barrel. Higher oil prices lead to higher U.S. dollar earnings for Canadian exporters, resulting in an increased value of the loonie.