USD/CAD: Loonie Snaps Two-Day Gaining String on Dovish ECB

The Canadian dollar snapped two-day gains, depreciating against the U.S. dollar in early trade Thursday as the European Central Bank’s more dovish tone on its so-called forward guidance on interest rates helped boost the greenback.

The dollar to loonie conversion today rose to 1.2594 against the U.S. currency, up from Wednesday’s close of 1.2552. The Canadian dollar had lost about 3% in June – posting the biggest monthly drop since March 2020, the early days of the pandemic, and weakened over 1.3% so far this month.

“While the CAD remains fundamentally undervalued, in our opinion, it is not clear at all that it can strengthen materially at this point. The good news is perhaps somewhat priced in and higher commodities and/or an even more hawkish BoC stance may be needed to persuade investors of the attractions that we continue to see in the CAD. Canada releases Housing Starts, International Securities Transactions and Wholesale Sales data this morning,” noted Shaun Osborne, Chief FX Strategist at Scotiabank.

Canada is the world’s fourth-largest exporter of oil, which extended gains on concerns of tighter supplies, providing support to the loonie. U.S. West Texas Intermediate (WTI) crude futures traded higher by 0.11 cents, or 0.17%, to $70.44 a barrel.

The dollar index, a measurement of the dollar’s value relative to six foreign currencies, was trading 0.11% higher at 92.865 – not far from this year’s high of 93.437.

The U.S. dollar gained after the ECB said interest rates would stay at record low levels for a long period of time and warned that the new Delta variant of the coronavirus posed a threat to the eurozone growth.

The world’s dominant reserve currency, the USD, is expected to rise further over the coming year, 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.