USD/CAD: Loonie Gains on Rising Oil Prices; Fed Decision in Focus

Canada’s dollar gained against the U.S. counterpart on Wednesday as stocks gained and oil prices recovered, but currency traders are awaiting the Fed decision due later in the day, as an unexpected hawkish announcement would boost the greenback.

The dollar to loonie conversion fell to 1.2556 against the U.S. currency, down from Tuesday’s close of 1.26. 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 1.51% so far this month.

Canada is the world’s fourth-largest exporter of oil, which edged higher on hopes of a bullish inventory report. Increasing oil prices result in higher U.S. dollar earnings for Canadian exporters, which results in a stronger loonie. U.S. West Texas Intermediate (WTI) crude futures traded higher by 0.52 cents, or 0.74%, to $72.16 a barrel.

But the gains were capped by Canada’s June inflation data, which slowed to 3.1% from 3.6% in May.

“Following the BoC’s taper at the July meeting, Citi Research’s base case is for another tapering in October, with net-zero purchases by year-end and BoC to commence rate hikes in 2022. USDCAD is trading below a good resistance range at 1.2647-53 (March and April 2021 highs). If this continues, the next support level to watch will be a rising trend line currently standing at 1.2457,” noted analysts at Citi.

“Both fundamentals and technical 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).”

The dollar index, a measurement of the dollar’s value relative to six foreign currencies, was trading 0.23% higher at 92.642 – not far from this year’s high of 93.437.

The U.S. Federal Reserve is due to make an interest rate decision on Wednesday. Traders remain cautious ahead of the policy decision as any unexpected hawkish surprise would lift the greenback. However, most economists believe this to be a non-event.

“We see a meaningful possibility that today’s Fed announcement will be a non-event, with the spread of the Delta Variant offering a reason for the FOMC to postpone more serious tapering communication until Jackson Hole. If anything, the balance of risks for the dollar appears tilted to the upside, also thanks to the China-related risk-off environment,” noted analysts at ING.

However, the risk that 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.