USD/CAD: Loonie Hits Nearly One-Week Low Ahead of U.S. Inflation Data

The Canadian dollar hit its lowest level in nearly two weeks against the U.S. counterpart in early trading on Wednesday as investors remained cautious ahead of U.S. inflation data.

“We see little capacity for G10FX markets to move away from a consolidation tone ahead of US CPI on Wednesday – the main event risk of the week. Upcoming central bank speak does present another potential risk consideration but we are inclined to think that the data will be more important for shaping market sentiment overall, given that the key central bank decisions have already passed,” noted currency analysts at TD Securities.

“We remain biased to modest USD firmness as seasonal trends become more forceful.”

Today, the USD/CAD rose to 1.2446 up from Tuesday’s close of 1.2436. Still, the Canadian dollar gained about 2.3% last month after depreciating around 0.5% in September.

The dollar index, which measures the value of the dollar against six foreign currencies, was trading 0.35% higher at 94.287. Most major currencies were little changed as FX traders waited for U.S. inflation data today.

The consumer price index in the United States is expected to come at 4.3% annually, which is above the U.S. Federal Reserve’s 2% inflation target.  A stronger than expected reading will prompt the Federal Reserve to tighten monetary policy sooner than expected.

The greenback gained on Friday the U.S. employment report showed that jobs were up more than expected during October as COVID-19 infections decreased over the summer. After a summer slump, the labour market rebounded in October adding 531,000 jobs and trimming the unemployment rate to 4.6%.

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.

Canada is the world’s fourth-largest exporter of oil, which edged lower ahead of the U.S. inventory report. At the time of writing, U.S. West Texas Intermediate (WTI) crude was trading 0.51% lower at $83.7 a barrel. Lower oil prices lead to lower U.S. dollar earnings for Canadian exporters, resulting in a decreased value of the loonie.