USD/CAD: Loonie Hits Nearly One-Month High Ahead of BoC Rate Decision

The Canadian dollar hit a near one-month high against its U.S. counterpart in early trading on Wednesday ahead of the Bank of Canada’s monetary policy announcement, where it may address market expectations of successive rate hikes next year.

“The loonie has been rebounding strongly since the start of the week, and USD/CAD has now moved back below the 1.2700 mark. The Bank of Canada announces monetary policy today – here’s our meeting preview – and a major focus will be on the Bank’s assessment of the risks associated with the Omicron variant. We expect the BoC to keep its cautious language, but we doubt they will go as far as rethinking their policy tightening plans considering the ever-strengthening jobs and growth backdrop in Canada,” noted Francesco Pesole, FX Strategist at ING.

“We think this will match market expectations and the announcement should have a limited impact on the Canadian dollar, which should remain almost solely driven by external factors (risk sentiment and oil prices). Considering the market is back to pricing five rate hikes in 2022 by the BoC, the bar for a hawkish surprise also appears to be quite high. Further improvements on Omicron-related sentiment may see USD/CAD extend its decline to 1.2500 by year-end.”

The Bank of Canada will try to achieve a balance between employment gains and Omicron risks. Today, the USD/CAD pair fell to 1.2613 down from Tuesday’s close of 1.2638. The Canadian dollar hit its lowest level in over two months last week. After gaining about 2.3% in October, the loonie weakened over 3.1% last month.

Canada is the world’s fourth-largest exporter of oil, which edged higher on improved sentiment as fears over the Omicron variant of coronavirus eased worldwide. At the time of writing, U.S. West Texas Intermediate (WTI) crude was trading 1.0% higher at $72.76 a barrel. Higher oil prices lead to higher U.S. dollar earnings for Canadian exporters, resulting in an increased value of the loonie.

The greenback fell for a second consecutive day as investors hoped that a new Coronavirus strain would not derail the global economic recovery. At the time of writing, the dollar index, which measures the value of the dollar against six foreign currencies, was trading 0.10% lower at 96.275.

The Invesco DB US Dollar Index Bullish Fund, which is designed for investors who want a cost-effective and convenient way to track the value of the U.S. dollar relative to a basket of the six major world currencies – the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc – closed 0.07% higher at 25.82 on Tuesday.

The last minutes of the U.S. Federal Reserve meeting confirmed market expectations that the Fed will raise rates sooner than other major central banks. The greenback hovers near the 16-month high against most other major currencies because of the hottest U.S. inflation reading in a generation that pushed investors to bet that interest rates are likely to rise sooner than previously thought.

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.