USD/CAD: Loonie Snaps Two-Day Losing Streak Ahead of U.S. Inflation Data

The Canadian dollar snapped its two-day losing streak against its U.S. counterpart in early trading on Friday ahead of the U.S. inflation data, which could cement a rate hike course in 2022; recovery in energy prices also supported the commodity currency.

“Though the Bank of Canada dropped the transitory inflation language and warned of broadening price pressures, overall, the central bank was less hawkish than the market expected. Rates remained on hold and the central bank talked of an economy that still required considerable support. This resulted in some Canadian Dollar underperformance despite gains against the Buck,” noted analysts at LMAX.

“Finally signs of a major bottom in the works after a severe decline from the 2020 high. A recent weekly close back above 1.2500 encourages the constructive outlook and opens the door for a push back towards next critical resistance in the 1.3000 area. Any setbacks should be well supported into the 1.2200s.”

Today, the USD/CAD pair fell to 1.2691 down from Thursday’s close of 1.2713. The Canadian dollar hit its lowest level in over two months last week. After gaining about 2.3% in October, the loonie weakened over 3.1% last month.

Canada is the world’s fourth-largest exporter of oil, which edged higher on improved sentiment as fears over the Omicron variant eased worldwide. At the time of writing, U.S. West Texas Intermediate (WTI) crude was trading 0.97% higher at $71.63 a barrel. Higher oil prices lead to higher U.S. dollar earnings for Canadian exporters, resulting in an increased value of the loonie.

As traders awaited U.S. inflation data later in the day, the greenback held its ground. Prices are expected to rise 6.8% annually and any upside surprise may lead to a faster Fed taper and rate hike.

Also, investors looked forward to the Federal Reserve’s key meeting next week. At the time of writing, the dollar index, which measures the value of the dollar against six foreign currencies, was trading 0.10% higher at 96.365. Next week, the Fed will likely announce an acceleration of its bond-buying program. Fed’s decision may also be influenced by consumer price inflation data due Friday.

“Market moves have been detached from data inputs since last Friday’s NFP, but we should see fresh focus on the US inflation story today as November CPI numbers are released. There is likely some room for the dollar to rally further if the headline rate breaks above 7%, while we see quite contained downside risk for the greenback in case of a moderately below consensus read,” noted Francesco Pesole, FX Strategist at ING.

“That’s because inflation would need to drop quite sharply before the market can reasonably price out the Fed tightening cycle in 2022. We still expect the dollar to remain generally supported into next week’s Fed meeting.”

The Invesco DB US Dollar Index Bullish Fund, which is designed for investors who want a cost-effective and convenient way to track the value of the U.S. dollar relative to a basket of the six major world currencies – the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc – closed 0.35% higher at 25.79 on Thursday.

The last minutes of the U.S. Federal Reserve meeting confirmed market expectations that the Fed will raise rates sooner than other major central banks. The greenback hovers near the 16-month high against most other major currencies because of the hottest U.S. inflation reading in a generation that pushed investors to bet that interest rates are likely to rise sooner than previously thought.

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.