USD/CAD: Loonie Snaps Three-Day Losing Streak Ahead of BoC Decision, Firm Oil Prices Support

The Canadian dollar snapped its three-day losing streak against its U.S. counterpart in early trading on Tuesday ahead of the Bank of Canada’s monetary policy announcement on Wednesday, where it may address market expectations of successive rate hikes next year.

Investors will closely watch the Bank of Canada’s monetary policy decision on October 27. As inflation increases and the jobs report for September is very strong, the BoC will likely reduce its bond purchases further.

“Markets price earlier rates liftoff/ policy normalization for BoC. However, the BoC remains a candidate to push back on earlier rates liftoff at its meeting this week, as Citi do not see enough evidence so far to convince the BoC to turn more hawkish. But even a signal that the BoC sees rates liftoff sometime in H2’2022 would likely be taken positively by CAD investors. remains a “buy on dips,” noted analysts at Citi.

Today, the USD/CAD fell to 1.2349 down from Monday’s close of 1.2381. The Canadian dollar gained about 2.5% so far this month after depreciating around 0.5% in September.

“USDCAD is little changed over the course of the past week but that is indicative of a subtle change in this market’s technical condition in and of itself. A weekly “doji” candle through last Friday followed the mid-week daily bull reversal signal (outside range) and strongly suggests that the USD sell-off has run out of steam, at least for now,” noted Shaun Osborne, Chief FX Strategist at Scotiabank.

“Minor gains through the 1.24 area might ease some of the USD’s short-term oversold condition but the bullish daily reversal suggests the USD may rally a little more. We think a push to 1.25 will result in a clear move above resistance points clustered around 1.2405/25. A “stretch” goal might be 1.26; the mid-year price chop and peaks around 1.28 look somewhat Head & Shoulder-ish (and targets a drop to 1.21). However, a retest of the neckline breakdown/40-day at 1.26 cannot be excluded as a technical risk.”

Canada is the world’s fourth-largest exporter of oil, which edged higher on supply and storage tightness. At the time of writing, U.S. West Texas Intermediate (WTI) crude was trading 0.32% higher at $84.03 a barrel. Higher oil prices lead to higher U.S. dollar earnings for Canadian exporters, resulting in an increased value of the loonie.

The dollar index, which measures the value of the dollar against six foreign currencies, was trading 0.06% lower at 93.756. The U.S. dollar has gained across most currencies in the last few weeks as investors have become concerned the Fed may withdraw its economic support due to slow global growth and high inflation.

Investors were concerned that increasing inflationary pressures could pose a headwind to the economy and affect how soon the Federal Reserve may be able to raise rates. Rising bond yields have contributed to the strengthening of the currency.

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.