USD/CAD: Loonie Snaps Five-Day Winning Streak as U.S. 10-year Yield Climbs
The Canadian dollar snapped its five-day winning streak against its U.S. counterpart on Tuesday after the benchmark 10-year U.S. Treasury yield climbed to its highest level since June, boosting the greenback.
“USDCAD closes the week lower at 1.2650 as the BoC looks to nearing its own goal of absorbing around 350k job gains that could pressure it to consider signalling rate increases as early as H1’2022. Together with Citi’s expectations for Brent crude to trade higher in Q4 (USD75-80 a barrel), this could make CAD the “buy of the quarter in Q4” vs FX funders,” noted analysts at Citi.
In the early morning hours of Tuesday, the benchmark 10-year US Treasury yield, which moves inversely to bond prices, surged again, reaching its highest levels since June. 10-year Treasury bond yields rose 7.4 basis points to 1.558%. Bond yields on 30-year Treasury notes increased by 9.7 basis points, rising to 2.092%. That supported the greenback.
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.
“A potentially “hawkish” FOMC plus concerns over the resolution of the US debt ceiling that creates a macro risk-off event could combine to deliver some near-term tactical gains in DXY,” noted analysts at Citi.
“Ultimately, such gains should be faded as – (1) pace of any Fed taper is likely gradual and the Fed, ECB, BoJ, PBoC support risk sentiment well into 2022; and (2) any potential government shutdown beyond September 30th is likely to be temporary. A 91.28 – 93.44 range in DXY remains the base case though FOMC/potential government shutdown could briefly take DXY above the March 2021 high at 93.44 towards 94.50.”
Canada is the world’s fourth-largest exporter of oil, which edge higher on supply concerns. U.S. West Texas Intermediate (WTI) crude futures were trading 0.04% higher at $75.48 a barrel. Higher oil prices lead to higher U.S. dollar earnings for Canadian exporters, resulting in an increased value of the loonie.