USD/CAD: Loonie Gains in Early Trade on Rising Oil Prices

The Canadian dollar strengthened against the U.S. dollar in early trade Wednesday as stocks edged higher and oil prices recovered.

The dollar to loonie conversion today fell to 1.2625 against the U.S. currency, down from Tuesday’s close of 1.2677. 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 2% so far this month.

Canada is the world’s fourth-largest exporter of oil, which rose over 2% as risk appetite improved, providing support to the loonie. U.S. West Texas Intermediate (WTI) crude futures rose by 1.96 cents, or 2.96%, to $69.19 a barrel.

“USD/CAD remains technically strong. Gains have extended further over the past week—to the point that we can no longer really consider this USD rise as corrective. Increasingly, the technical odds are tilting towards the idea that the early June low at 1.2007 was the low for the move down from 1.47. Short-term dynamics are USD-bullish; gains through the past couple of sessions are consolidating in a bull wedge/flag pattern, with renewed, short-term gains likely on a break above 1.2780,” noted Shaun Osborne, Chief FX Strategist at Scotiabank.

“Short, medium and long run DMI oscillators are bullishly aligned for the USD, limiting downside risks (we spot short-term support at 1.2715/35 now) and supporting the outlook for ongoing gains. Key USD support is 1.2625/50 (a small gap on the chart may have to be filled here at some point). Recall that the 1.2635 point represented the 23.6% Fibonacci resistance of the 1.47/1.20 move down. We look for the USD to progress towards the 1.30 area (1.3024 being the 38.2% Fib point) in the next 1-3 months.”

The dollar index, a measurement of the dollar’s value relative to six foreign currencies, was trading 0.10% higher at 93.067 – not far from this year’s high of 93.437.

“BoC tapers the pace of its QE purchases to C$2bn/week as widely expected, in a policy decision that is largely neutral, if not slightly dovish with emphasis on a full recovery that is still a ways off. Policy guidance is little changed, with the output gap still estimated to close in H2 2022. Our base case is for another tapering in Oct, with net-zero purchases by year-end and BoC to commence rate hikes in 2022,” noted analysts at Citibank.

“USD/CAD ends the week at 1.2615, reflecting USD strength and some disappointment from a fairly neutral BoC statement last week given the already-built rate expectations on the high side for 2022. However, both fundamentals and technicals continue to support the “buy CAD on dips” sentiment not only vs USD but also against low yielders (EUR, JPY and CHF).”

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.