USD/CAD: Loonie Snaps Three-Day Losing Streak Ahead of BoC Macklem’s Speech

The Canadian dollar snapped its three-day losing streak against its U.S. counterpart on Thursday as investors were awaiting Bank of Canada Governor Tiff Macklem’s speech that may provide insight into future bond purchases.

The USD/CAD pair fell to 1.2651 today, down from Wednesday’s close of 1.2689. The Canadian dollar lost about 1% in July and has further dropped over 1.2% last month.

On Wednesday, the Bank of Canada held its key interest rate, citing fears that the pandemic and supply bottlenecks might stall the economic recovery. The central bank has maintained its overnight rate target at 0.25% and said it will continue buying bonds at a rate of $2 billion a week as part of its quantitative easing program.

At 1600 GMT, Governor Macklem will deliver a speech regarding the reinvestment phase of the QE program.

“In general, it appears that most of the negatives are already in the price when it comes to CAD: our short-term fair value model is showing a 2.1% overvaluation in USD/CAD, which is above the 1.5 standard deviation band, so clearly indicating a risk premium has been built on the loonie. At the same time, a more cautious BoC should mean that CAD may struggle to recover some of the recent losses just yet,” noted Francesco Pesole, FX Strategist at ING.

The dollar index, which measures the value of the dollar against six foreign currencies, was trading 0.04% lower at 92.614. After the European Central Bank said it would reduce its emergency bond purchases in the coming quarter, the euro remained modestly up against 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 two rate hikes by the Fed in 2023. 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 edge higher on low U.S. output after Hurricane Ida. U.S. West Texas Intermediate (WTI) crude futures were trading 0.29% higher at $69.51 a barrel. Higher oil prices lead to higher U.S. dollar earnings for Canadian exporters, resulting in an increased value of the loonie.

On the other hand, Global demand for crude oils is declining due to recent restrictions over the Covid-19 Delta variant and a lack of buyers. The slowing Chinese economy dampened sentiment and have knocked investors off balance. As a major exporter of commodities, including oil, Canada’s dollar tends to be sensitive to the outlook for global economic growth.