USD/CAD: Loonie Remains Weak Ahead of Fed Minutes and U.S. Data; Downside Risks High

The Canadian dollar weakened against its U.S. counterpart on Wednesday as investors remain cautious ahead of the release of Fed minutes as well as key U.S. data, including GDP figures and the key PCE price index.

“Today’s focus will be on the minutes of the November FOMC meeting, a chance for the market to gauge the divergence between hawks and doves within the committee as tapering was announced. We see no catalysts for a dollar correction heading into the Thanksgiving break,” said Francesco Pesole, FX Strategist at ING.

“On the data side, we should see a modest upward revision to 3Q GDP data (likely to 2.1% or 2.2% quarter-on-quarter), while October’s PCE, personal income and durable goods orders are all likely to improve from the month before. We struggle to see a clear catalyst for a material dollar correction before the Thanksgiving break and the risk of markets finding new reasons to support their hawkish bets in the Fed minutes – combined with good data – suggests the dollar may inch higher today.”

Today, the USD/CAD pair rose to 1.2696 up from Tuesday’s close of 1.2664. After gaining about 2.3% last month, the Canadian dollar weakened nearly 2.4% so far this month.

The dollar index, which measures the value of the dollar against six foreign currencies, was trading 0.29% higher at 96.965 – close to a 16-month high. 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.

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.

“There is a case to be made for DXY to tactically top out around the current 96.00 area given market pricing for a relatively shallow expected Fed terminal rate of 1.5% and UST 10Yr real yields still below -1.0% – hardly the mix to take DXY to 97.50+,” Citi analyst added.

“A couple of tactical drivers before year-end that could potentially put a short-term (and temporary) bid into DXY that include – (1) the unexpected announcement Friday of a 20-day national lockdown by Austria, and (2) renewed US debt ceiling concerns that may see financial institutions placing more of their USD cash balances with the Fed if such concerns intensify by mid-December. This may reduce the availability of USD liquidity to markets and put a temporary bid into USD.”

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 higher on improved sentiment but increasing OCID-19 cases in Europe that could threaten the economic economy is the risk. At the time of writing, U.S. West Texas Intermediate (WTI) crude was trading 0.15% higher at $78.62 a barrel. Higher oil prices lead to higher U.S. dollar earnings for Canadian exporters, resulting in an increased value of the loonie.