USD/CAD: Loonie Strengthens Despite Strong Greenback; Depreciation Risk Remains High

The Canadian dollar strengthened against its U.S. counterpart on Thursday despite the greenback surged to a fresh one-year high against a basket of currencies, mainly due to expectations of at least one rate hike next year and gradual removal of stimulus by the end of the year.

The USD/CAD pair fell to 1.2671 today, down from Wednesday’s close of 1.2754. The Canadian dollar lost over 1.2% last month and further depreciated over 0.5% so far this month.

The dollar index, which measures the value of the dollar against six foreign currencies, was trading nearly flat at 94.302- its highest since Sept 28 last year. The greenback has gained over the past two sessions as investors have become concerned the Fed may withdraw its economic support due to slow global growth and high inflation. Rising bond yields have contributed to the strengthening of the U.S. dollar.

On Tuesday, the benchmark 10-year US Treasury yield, which moves inversely to bond prices, surged again, reaching its highest levels since June. 10-year Treasury bond yields rose 7.4 basis points to 1.558%. Bond yields on 30-year Treasury notes increased by 9.7 basis points, rising to 2.092%.  That supported 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 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.

“We might see some tentative signs of stabilisation in risk sentiment today, but we think that a number of USD-positive factors (hawkish re-pricing of Fed expectations, US debt-ceiling concerns and lingering Evergrande fears) will keep any dollar correction short-lived. Meanwhile, central bank speakers in Sintra may have an overall contained impact,” said Francesco Pesole, FX Strategist at ING.

Canada is the world’s fourth-largest exporter of oil, which edge lower after U.S. inventories rise. U.S. West Texas Intermediate (WTI) crude futures were trading 1.28% lower at $75.65 a barrel. Lower oil prices lead to lower U.S. dollar earnings for Canadian exporters, resulting in a decreased value of the loonie.