USD/CAD: Loonie Remains Range-Bound, Could Turn Volatile

The Canadian dollar traded marginally lower but remained range-bound in lackluster trade against the U.S. dollar on Wednesday amid volatility seen in crude prices.

Today, the dollar to loonie conversion rose to 1.2562, up from Tuesday’s close of 1.2536. The Canadian dollar had lost about 1% in July – the second biggest monthly drop since September 2020 and has weakened about 0.6% so far this month.

Canada is the world’s fourth-largest exporter of oil, which edged lower on rising concern that the new delta variant will derail the global economic recovery.  U.S. West Texas Intermediate (WTI) crude futures were trading 2.14% lower at $69.06 a barrel.

High oil prices lead to higher U.S. dollar earnings for Canadian exporters, resulting in an increased value of the loonie.

“USDCAD’s late July move lower has stalled and may be reversing. The USD decline found support in the low 1.24 zone, near retracement and (40-day MA) support. At the very least, the move lower from the mid-July peak around 1.28 has stalled and needs to consolidate. The move higher from Friday’s low is impulsive and is developing strong, if only short-term at the moment, upward momentum,” noted Shaun Osborne, Chief FX Strategist at Scotiabank.

“The USD’s breach of the 1.2525/30 zone, which was the base of the late July sideways range for the USD, implies scope for additional gains towards 1.2605 which was the top of that range. Trend strength signals are either bullish or tilting towards bullish from the USD’s perspective, suggesting that the USD move up may well develop further in the next few days/weeks. Key USD support now is 1.2425. We are constructive on the USD and look to fade minor dips.”

The most important data point will come on Friday, when the Canadian government reports about the July employment data numbers for July.

The dollar index, a measurement of the dollar’s value relative to six foreign currencies, was trading 0.17% higher at 92.239 at the time of writing. Still, not far from this month’s low of 91.782.

The dollar stalled its rally after the Fed highlighted that the interest rate hike is far away in its last week’s monetary policy decision. The U.S. central bank also did not give any hint about reducing its purchases of government bonds.

However, the risk that the world’s dominant reserve currency, the USD, recovery over the coming year is high, largely driven by the Fed’s expectation of two rate hikes in 2023.

A strengthening dollar and growing risk that the Federal Reserve would tighten its monetary policy earlier than expected would push the USD to CAD pair higher.