USD/CAD: Loonie Maintains Range Play Ahead of Retail Sales Data

The Canadian dollar largely remained range-bound in lacklustre trade against its U.S. counterpart on Thursday as investors eye retail sales data scheduled to be released by end of this week.

“USDCAD settles Friday at 1.2550 and above the pivotal 1.2540 level, where the 55d and 100d MAs converge with the next major resistance seen at 1.2600. Like NZD however, CAD remains a buy on dips versus funders (EUR, JPY, CHF) in an environment where many have been expecting the BoC to push back on the aggressive market pricing following the recent softer Canadian October jobs report,” noted analysts at Citi.

“Citi still see April 2022 as the most likely timing for a first BoC rate hike with quarterly hikes to follow. But as market pricing is already in line with the Citi call scope for further hawkish surprises may be limited especially given exposure to medium-term weaker Chinese growth.”

Today, the USD/CAD pair traded in a range of 1.2624-1.2588. Still, after gaining about 2.3% last month, the Canadian dollar strengthened over 1.7% so far this month. On Friday, both headline and core sales in Canada are expected to have declined in September. Worse than expected reading will push the Canadian dollar lower.

The dollar index, which measures the value of the dollar against six foreign currencies, was trading 0.11% lower at 95.722. Last week, the greenback rose to 16-month highs against most other major currencies because of the hottest U.S. inflation reading in a generation that pushed investors to bet that interest rates are likely to rise sooner than previously thought.

In October, U.S. consumer prices rose faster than expected due to surges in gasoline and food prices, showing that inflation could remain high well into next year amid snarled global supply chains. Labor Department data on Wednesday showed that the consumer price index rose 0.9% last month after rising 0.4% in September. In the 12 months through October, the CPI increased 6.2% up from September’s 5.4% increase.

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 on easing supply concerns. At the time of writing, U.S. West Texas Intermediate (WTI) crude was trading nearly flat at $78.4 a barrel. Lower oil prices lead to lower U.S. dollar earnings for Canadian exporters, resulting in a decreased value of the loonie.

“We expect oil to average 76$/bll (Brent) in 2022, with a gradual return to surplus driving prices moderately lower. Such a gradual downtrend should not be enough to undermine the recovery in the Canadian oil and gas industry, currently, a major driver of economic strength,” noted Francesco Pesole, FX Strategist at ING.

“Having the lowest volatility among G10 commodity currencies, CAD may emerge as a popular carry bet against low-yielders next year. We think CAD has the lowest downside risk in the commodity FX space and expect USD/CAD to stay closer to 1.20 rather than to 1.25 in 2022.”