USD/CAD: Loonie Weakens as BoC Shuns Hawkish Shift, Weak Crude Oil Prices Hurt

The Canadian dollar weakened against its U.S. counterpart in early trading on Thursday after the Bank of Canada disappointed some currency traders who had hoped for a more hawkish stance; weak energy prices also weighed on the commodity currency.

As expected, the BoC kept its monetary policy unchanged and maintained its prediction that the first hike may occur in April next year. Nevertheless, currency traders were on alert for a more hawkish shift from the central bank following strong inflation, employment, and GDP growth.

“The Canadian dollar was trading marginally weaker after the rate announcement, but the impact is proving very contained and short-lived given the lack of surprises in the statement. Some of the recent CAD strength is likely being fuelled by the notion that the BoC is ready to respond to inflation pressures with tightening, assuming the global picture does not significantly worsen,” noted Francesco Pesole, FX Strategist at ING.

“We think…statement did very little to dent this notion, allowing CAD to continue benefiting from the rebound in global sentiment. We think USD/CAD may extend its decline to 1.2500 by the end of the year, although that is heavily reliant on further improvements in the Omicron-related sentiment.”

Today, the USD/CAD pair rose to 1.2689 up from Wednesday’s close of 1.2651. 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 lower on Omicron and inflation worries. At the time of writing, U.S. West Texas Intermediate (WTI) crude was trading 0.58% lower at $72.76 a barrel. Lower oil prices lead to lower U.S. dollar earnings for Canadian exporters, resulting in a decreased value of the loonie.

The greenback gained as 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 0.27% higher at 96.150. 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.

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 0.45% lower at 25.70 on Wednesday.

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.