USD/CAD: Loonie Hits One-Week High on Firm Oil Prices, Better-Than-Expected Retail Sales

The Canadian dollar hit over a one-week high against its U.S. counterpart, strengthening for the third straight day on Thursday as oil prices jumped and retail sales data for July were better-than-expected.

Compared with expectations for a decline of 1.2%, retail sales in Canada dropped 0.6% to $55.8 billion in July, while advance estimates showed a 2.1% increase in August. That boosted confidence among investors.

“The Fed caused a lot of volatility in the foreign currency market yesterday. Indeed, the greenback momentarily climbed to a monthly high as Jerome Powell announced that he was considering a key rate hike next year. USD/CAD traded at 1.2796 before dropping significantly back to 1.2660 following lower volatility as well as renewed hope surrounding the situation with Chinese real estate giant Evergrande,” noted analysts at Laurentian Bank of Canada.

“Despite the decline in the barrel, the loonie is benefiting from the weaker US dollar and the fact that much of the financial community was long gamma before Powell’s speech. In technical analysis, the next support level for the USD/CAD price is at 1.2636.”

The USD/CAD pair fell to 1.2631 today, down from Wednesday’s close of 1.277. The Canadian dollar lost over 1.2% last month and further depreciated over 0.3% so far this month.

Canada is the world’s fourth-largest exporter of oil, which edge higher as U.S. oil inventories fell. U.S. West Texas Intermediate (WTI) crude futures were trading 0.89% higher at $72.87 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 0.47% lower at 93.020. The greenback has largely ignored the announcement by the Federal Reserve on Wednesday that it will soon cease supporting pandemic-related stimulus.

“A potentially “hawkish” FOMC plus concerns over resolution of the US debt ceiling that creates a macro risk-off event could combine to deliver some near-term tactical gains in DXY,” noted analysts at Citi.

“Ultimately, such gains should be faded as – (1) pace of any Fed taper is likely gradual and the Fed, ECB, BoJ, PBoC support risk sentiment well into 2022; and (2) any potential government shutdown beyond September 30th is likely to be temporary. A 91.28 – 93.44 range in DXY remains the base case though FOMC/potential government shutdown could briefly take DXY above the March 2021 high at 93.44 towards 94.50.”

However, 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 hikes 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.