USD/CAD: Loonie Snaps Three-Day Winning Streak as Evergrande Uncertainty Supports Greenback

The Canadian dollar snapped its three-day winning streak against its U.S. counterpart on Friday as concerns about the future of beleaguered property developer Evergrande Group have rattled markets around the globe, helping the greenback rebound from its steep descent.

After its biggest drop in nearly a month overnight, the dollar enjoyed a brief pause as questions lingered about developments involving property developer China Evergrande Group.

Due to its huge debt, China Evergrande Group has run short on cash, missing a deadline for making payments of $83.5 million on Thursday, making investors anxious whether it will make the payment within the 30-day grace period.

China’s financial system would face systemic risks if the company collapses. That provided greenback’s safe-haven appeal with a further boost. However, at the time of writing the dollar index, which measures the value of the dollar against six foreign currencies, was trading 0.10% lower at 93.370.

“Next week, Canada sees the release of July’s GDP numbers. Growth has been the missing piece in an otherwise very robust data-flow for CAD, as a surprise 2Q contraction in activity was the main reason for the Bank of Canada to pause tapering,” noted Francesco Pesole, FX Strategist at ING.

“Still, even if we see a below-consensus GDP read, the very encouraging signals coming from the jobs market and higher inflation should remain enough to convince the BoC to start tapering again in October. We think CAD may stay among the best performers within the pro-cyclical space next week, although its fate remains very much tied to developments in the Evergrande saga.”

The USD/CAD pair rose to 1.273 today, up from Thursday’s close of 1.2655. The Canadian dollar lost over 1.2% last month and further depreciated over 0.6% so far this month.

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 0.59% higher at $73.71 a barrel. Higher oil prices lead to higher U.S. dollar earnings for Canadian exporters, resulting in an increased value of the loonie.

Last but not the least, 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.

“The CAD was one of the few major currencies that gained ground against the USD over the course of the week with the backdrop of financial troubles at Evergrande, China’s second-largest property developer, and Powell’s hawkish turn at his post-announcement presser offset by a fifth consecutive rise in crude oil prices and generally higher Gov of Canada yields versus its G10 counterparts,” noted Shaun Osborne, Chief FX Strategist at Scotiabank.

“Canada’s federal election on Monday came and went with limited impact on the CAD as the status quo of a Liberal minority government propped up by the NDP was maintained. The stimulative policy is set to continue for the foreseeable future while certain Liberal plans like pushing for $10/day childcare could unlock an important economic impulse—although there remains much to be done on this front legislatively.”