USD/CAD: Loonie Gains on Higher Oil Prices; Jobs Data Eyed

The Canadian dollar strengthened against its U.S. counterpart on Thursday as rising oil prices due to supply concerns supported the commodity currency, but investors stayed cautious ahead of both the U.S. and Canadian jobs reports.

“When financial market conditions turn less favourable on global growth concerns, like what happened in August, currencies that have rate hikes priced can often underperform as those expectations get pared back. Prior to the bout of global growth concerns, the market was priced for the end of tapering and two rate hikes by around Sept 2022,” noted currency analysts at MUFG.

“We do not expect the election to have much bearing on CAD which will be influenced more by BoC rate hike timing; the Fed’s timing on QE tapering; external market conditions in general and crude oil prices. We are assuming the BoC remains on track for rate hikes next year, with the weaker than expected Q2 GDP data in August unlikely to have much bearing on rate expectations, assuming COVID risks recede.”

The USD/CAD fell to 1.2537 today, down from Wednesday’s close of 1.2587. However, the Canadian dollar lost over 1.2% in August and further depreciated over 0.5% last month.

Canada is the world’s fourth-largest exporter of oil, which edge higher as OPEC+ kept its crude oil output stagnant at the current pace. As part of an agreement announced in July, the OPEC+ group agreed to increase output by 400,000 barrels per day (bpd) every month until at least April 2022.

At the time of writing, U.S. West Texas Intermediate (WTI) crude futures were trading 0.65% higher at $77.48 a barrel. Higher oil prices lead to higher U.S. dollar earnings for Canadian exporters, resulting in an increased value of the loonie.

The dollar index, which measures the value of the dollar against six foreign currencies, was trading 0.16% lower at 94.118. The greenback has gained against most major currencies as investors have become concerned the Fed may withdraw its economic support due to slow global growth and high inflation.

Investors were concerned that increasing inflationary pressures could pose a headwind to the economy and affect how soon the Federal Reserve may be able to raise rates. Rising bond yields have contributed to the strengthening of the currency.

Investors also remain cautious as they approach a key payroll report late this week that could provide a look at the next move of the Federal Reserve. Canada releases important employment data on Friday as well. The Canadian dollar could gain ground if both of these releases come in stronger than expected, although the employment report in the United States will obviously be key.

It is highly likely that the world’s dominant reserve currency, the USD, will rise by end of the year, largely due to the expectation of at least one rate hike next year. With the dollar strengthening and a possibility that the Federal Reserve will raise interest rates earlier than expected, the USD/CAD pair may experience a rise.