USD/CAD: Loonie Hits Over Three-Month High on Strong Manufacturing Sales, High Oil Prices

The Canadian dollar reached the highest in over three months against its U.S. counterpart on Thursday after the country’s manufacturing sales rose in August, thanks to gains in the petroleum and coal sectors as well as higher chemical sales.

Today, the USD/CAD fell to 1.2353 – strongest since July 6, 2021 – down from Wednesday’s close of 1.2441. The Canadian dollar gained about 2.5% so far this month after depreciating around 0.5% in September.

According to Statistics Canada, manufacturing sales increased 0.5% in August to $60.3 billion, due to gains in the petroleum and coal sectors and higher chemical sales. This is a rebound from July’s decline of 1.2%.

“The solid monthly jobs outcomes together with the Citi’s bullish call on Brent crude for the next 6 months, potentially makes CAD the “buy of the quarter in Q4” vs FX funders (USD, JPY, CHF and EUR). The team points to USDCAD headed lower, ultimately targeting a move to the 1.21 handle,” noted analysts at Citi.

Canada is the world’s fourth-largest exporter of oil, which edged higher on upgrade to the IEA demand forecast. At the time of writing, U.S. West Texas Intermediate (WTI) crude was trading 0.26% higher at $80.69 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 0.06% lower at 94.026. Today, the greenback dipped against most major, hitting its weakest level in the last ten days. However, the U.S. dollar has gained across most currencies in the last few weeks as investors have become concerned the Fed may withdraw its economic support due to slow global growth and high inflation.

“The dollar has weakened over the last couple of sessions, but our view would be that even if the Fed did make a policy mistake of too early and too aggressive tightening – it would still be positive for the dollar.  In our experience, flat or inverted yield curves are positive for currencies and such a US curve would be negative for pro-cyclical currencies,” noted Francesco Pesole, FX Strategist at ING.

“Expect the dollar to remain supported on dips, especially against energy importers with dovish central banks (Japan and Turkey stand out here). And today’s US PPI data should be a reminder that the Fed needs to become more vigilant about inflation.”

Investors were concerned that increasing inflationary pressures could pose a headwind to the economy and affect how soon the Federal Reserve may be able to raise rates. Rising bond yields have contributed to the strengthening of the currency.

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 U.S. dollar strengthening and a possibility that the Federal Reserve will raise interest rates earlier than expected, the USD/CAD pair may experience a rise.