USD/CAD: Loonie Hits Two-Week High as Fed Taper Worries Ease

The Canadian dollar strengthened to a two-week high on Monday against its U.S. counterpart as the greenback broadly weakened after Federal Reserve chair Jerome Powell gave no hint on taper timeline in his speech at the Jackson Hole symposium.

The USD/CAD pair fell to 1.2569 today, down from Friday’s close of 1.2626. The Canadian dollar lost about 1% in July and has further dropped about 1% this month.

The dollar index, which measures the value of the dollar against six foreign currencies, was trading 0.04% lower at 92.642. The dollar fell on Friday after Federal Reserve Chair Jerome Powell gave no indication of a tapering in a much-anticipated speech on Friday.

These comments from Powell are contrary to what other policymakers have said, making next month meeting very interesting for investors.

“The USD has been choppy in the aftermath of Fed Chairman Powell’s long-awaited Jackson Hole speech.  What we got from the chairman today was probably about as much as we might have expected.  He appears to support the idea of the Fed starting to taper asset purchases later this year and, really, anything else against the clamour for tapering from other Fed officials this week would have been a surprise.  But the Fed remains keen to stress that tapering does not mean rate tightening and this latter message likely accounts for the drop in the USD in the wake of the remarks,” noted Shaun Osborne, Chief FX Strategist at Scotiabank.

“USDCAD is heading for a drop on the daily chart into the end of the week but that follows a very strong rebound from/rejection of trend support just under 1.26 that developed through mid-week.  We think trend support (1.2595) and the 40-day MA (1.2565) represent a strong zone of support for the USD over the coming week.  We spot resistance at 1.2700/05 but feel that near-term risks are tilted towards the USD gaining to the low 1.28s.  We favour fading USD weakness to the 1.26 area.”

However, it is likely that the world’s dominant reserve currency, the USD, will rise over the coming 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.

Canada is the world’s fourth-largest exporter of oil, which edge higher as tropical storm Ida is hit the Gulf Coast, disrupting oil supplies.

U.S. West Texas Intermediate (WTI) crude futures were trading 0.15% higher at $68.85 a barrel. Higher oil prices lead to higher U.S. dollar earnings for Canadian exporters, resulting in an increased value of the loonie.

On the other hand, Global demand for crude oils is declining due to recent restrictions over the Covid-19 Delta variant and a lack of buyers. The slowing Chinese economy dampened sentiment and have knocked investors off balance. As a major exporter of commodities, including oil, Canada’s dollar tends to be sensitive to the outlook for global economic growth.