USD/CAD: Loonie Range-Bound But On Track To End The Week Lower

The Canadian dollar looks set to end the week on a weaker note against its U.S. counterpart as the greenback was headed for its best week since June, mainly due to expectations of at least one rate hike next year and gradual removal of stimulus by the end of the year.

On Friday, the USD/CAD pair traded in the 1.2738-1.264 range. The Canadian dollar lost over 1.2% in August and further depreciated over 0.5% last month.

“CAD steady in 1.26-1.28 range thanks to stronger crude and higher yields. For the second consecutive week the CAD managed to withstand a solid bid for the dollar amid a continuing risk-off tone in markets, with month and quarter-end activity also likely supporting the USD. We think that China’s aggressive push to secure energy supplies for the next few months will keep energy commodities supported and act as key driver for CAD outperformance in the near term,” noted Shaun Osborne, Chief FX Strategist at Scotiabank.

“The technical picture for USDCAD is practically unchanged after the cross-traded in a relatively narrow range over the week—even since mid-July, USDCAD has traded mostly sideways with only a minor upward drift that is being roughly guided by the 50-day MA at 1.2625. A lack to make up much ground over the past month does suggest that gains will be limited to under the 1.30 level where the 100-week MA roughly stands and above which the dollar hasn’t closed in a year. Buying pressure will likely emerge upon a cross under 1.26 and stronger at 1.25.”

The dollar index, which measures the value of the dollar against six foreign currencies, was trading 0.15% lower at 94.086. The greenback has gained this week as investors have become concerned the Fed may withdraw its economic support due to slow global growth and high inflation.

Rising bond yields have contributed to the strengthening of the currency. This week, the benchmark 10-year US Treasury yield, which moves inversely to bond prices, surged to its highest levels since June.

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.

Canada is the world’s fourth-largest exporter of oil, which edge lower after U.S. inventories rise. U.S. West Texas Intermediate (WTI) crude futures were trading 0.37% lower at $74.78 a barrel. Lower oil prices lead to lower U.S. dollar earnings for Canadian exporters, resulting in a decreased value of the loonie.

“Ultimately, CAD should still be able to count on a supportive domestic story, but the short-term fate for the currency remains mostly reliant on the global risk dynamics. Today’s choppy environment should keep USD/CAD above 1.2700,” said Francesco Pesole, FX Strategist at ING.