USD/CAD: Loonie Strengthens as Oil Prices Bounce Back; FOMC Decision Eyed

The Canadian dollar strengthened against its U.S. counterpart on Wednesday as oil prices jumped after industry data showed U.S. crude stockpiles decreased more than expected last week following two hurricanes.

“The loonie remained a little volatile after the federal election. Despite a heated race between the Liberals and the Conservatives, the minority takeover of power by the PLC has supported the Canadian currency somewhat. At the time of this writing, the USD/CAD price is trading at 1.2782,” noted analysts at Laurentian Bank of Canada.

“In technical analysis, the next support level for the USD/CAD price is at 1.2759 while the first resistance level holds at 1.2865.”

The USD/CAD pair fell to 1.2746 today, down from Tuesday’s close of 1.2815. The Canadian dollar lost over 1.2% last month and further depreciated over 1% so far this month.

Canada is the world’s fourth-largest exporter of oil, which edge higher as U.S. oil inventories fell. U.S. West Texas Intermediate (WTI) crude futures were trading 1.52% higher at $71.55 a barrel. Higher oil prices lead to higher U.S. dollar earnings for Canadian exporters, resulting in an increased value of the loonie.

“Increasing concerns about the persistence of domestic elevated inflation and prospect of BoC’s goal of absorbing around 350k job gains insight could see the BoC start to consider signalling rate rises as early as by H1’2022. Together with Citi’s expectations for Brent crude to trade higher in Q4 (USD75-80), this could make CAD the “buy of the quarter in Q4” vs USD, EUR, JPY, CHF. USDCAD is struggling to break below strong support at 1.2555-79. A decisive break below this range is needed to open up for extended losses towards the double lows from Jul’21 at 1.2422-28,” noted analysts at Citi.

The dollar index, which measures the value of the dollar against six foreign currencies, was trading 0.03% lower at 93.173 ahead of the Federal Reserve monetary policy decision. The dollar reaches a one-month high on Monday, boosted by recent strong economic data and speculation regarding Fed tapering. Today, Fed policymakers could open discussions about reducing their monthly bond purchases are expected.

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.