USD/CAD: Loonie Maintains Range Play in Quite Trade; Next Week’s GDP Data Eyed

The Canadian dollar largely remained range-bound in lacklustre trade against the greenback on Monday as the U.S. markets remain closed for the Thanksgiving holiday today and tomorrow; however, investors would eye next week’s GDP data.

“With oil under pressure following reports that the US, China and other major oil consumers may be preparing to release crude oil reserves, CAD underperforms its peers. Citi expects the BoC to start lifting rates by April 2022 though comments from BoC Governor Macklem, while suggesting the Bank is getting closer to lift-off, also warn that they have not changed their view on the transitory nature of inflation,” noted analysts at Citi.

“Therefore, CAD still remains a buy on dips but more versus funders (EUR, JPY, CHF) than against USD and AUD.”

Today, the USD/CAD pair traded in a range of 1.2636-1.267. After gaining about 2.3% last month, the Canadian dollar weakened by nearly 2.2% so far this month.

The dollar index, which measures the value of the dollar against six foreign currencies, was trading 0.17% lower at 96.709 – close to a 16-month high. Minutes of the U.S. Federal Reserve meeting confirmed market expectations that the Fed will raise rates sooner than other major central banks.

“Overnight, we saw the release of the FOMC minutes – the meeting at which the Fed agreed to start tapering. ‘Various’ participants did propose more flexibility on expedited tapering and earlier tightening if inflation demanded it – but that position looks largely priced in,” noted Francesco Pesole, FX Strategist at ING.

“Yesterday’s release of the Fed’s preferred measures of inflation for October saw the headline and core PCE running at 5.0% and 4.1%, respectively – new cycle highs – and market pricing of the Fed cycle is staying firm. As if the dollar did not need any more help, the October trade deficit came in much better than expected at $83b – a reminder of US energy independence in what was a bad month for energy importers.”

The re-election of Jerome Powell as Federal Reserve Chair confirms market expectations that interest rates will go up next year. The Fed meets again December 14-15.

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.

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 U.S. oversupply worries. At the time of writing, U.S. West Texas Intermediate (WTI) crude was trading 0.14% lower at $78.28 a barrel. Lower oil prices lead to lower U.S. dollar earnings for Canadian exporters, resulting in a decreased value of the loonie.

GDP by income and expenditure data for the third quarter of 2021 will be released on November 30, 2021. A rise of 0.5% was reported in Q3 2021 after a decline of 0.3% in Q2.