USD/CAD: Loonie Hits Nearly One-Month Low Ahead of Snap Election
The Canadian dollar hit a near one-month low against its U.S. counterpart on Friday as falling energy prices and September 20 election uncertainties weighed on the commodity currency.
Next week’s federal reserve decision and the election in Canada will be closely watched by investors. Investors are concerned that Monday’s elections will lead to a deadlock that hinders government action against COVID-19 and impedes the recovery of the economy.
“Barring the scenario of a hung parliament, political uncertainty in Canada should ultimately dissipate, helping CAD realign with its short-term fair value. The latest data (labour market and inflation) have all but confirmed the view that the Bank of Canada will have to step in with another round of tapering in October, which should leave it on track to fully unwind QE by year-end, or by early-2022,” noted Francesco Pesole, FX Strategist at ING.
“Ultimately, markets will be left with some room to speculate that the first hike will be delivered before mid-2022 (which is currently in the BoC rate-path projections). The set of good fundamentals should, in our view, provide some sustained support to CAD into year-end, and we expect USD/CAD to trade consistently below 1.25 in 4Q21.”
Canada is the world’s fourth-largest exporter of oil, which edge lower as production in the Gulf of Mexico slowly returns. U.S. West Texas Intermediate (WTI) crude futures were trading 1.29% lower at $71.66 a barrel. Lower oil prices lead to lower U.S. dollar earnings for Canadian exporters, resulting in a decreased value of the loonie.
On Thursday, Canada’s Statistics Canada reported that wholesale sales declined 2.1% to $70.1 billion in July, as building materials and supplies sales plummeted. In total, it was the second consecutive decline and the biggest since April 2020. That raises concerns among investors that the economy is slowing.
The dollar index, which measures the value of the dollar against six foreign currencies, was trading 0.25% higher at 93.164. The dollar reaches a three-week high, boosted by recent strong economic data and speculation regarding Fed tapering. Fed policymakers will meet next week and open discussions about reducing their monthly bond purchases are expected.
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 two rate hikes by the Fed in 2023. 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.