USD/CAD: Loonie Weakens as Oil Prices Edge Lower; BoC Policy Decision Eyed

The Canadian dollar depreciated against its U.S. counterpart on Tuesday as the firm greenback and falling energy prices weighed on the commodity currency ahead of an interest rate decision from the Bank of Canada.

The USD/CAD pair rose to 1.2626 today, up from Friday’s close of 1.2526. The Canadian dollar lost about 1% in July and has further dropped over 1.2% last month.

Canada is the world’s fourth-largest exporter of oil, which edge lower because of rising Coronavirus cases and slowing growth in China. U.S. West Texas Intermediate (WTI) crude futures were trading 1.24% lower at $68.41 a barrel. Lower oil prices lead to lower U.S. dollar earnings for Canadian exporters, resulting in a decreased value of the loonie.

On the other hand, Global demand for crude oils is declining due to recent restrictions over the Covid-19 Delta variant and a lack of buyers. The slowing Chinese economy dampened sentiment and have knocked investors off balance. As a major exporter of commodities, including oil, Canada’s dollar tends to be sensitive to the outlook for global economic growth.

Moreover, the Bank of Canada will also announce its interest rate decision on Wednesday, where they are not expected to make any changes to its monetary policy.

“Market awaits this week’s Canadian jobs report with Citi Research expecting the BoC to err on the more hawkish side later in the year, particularly if the Canadian jobs report this week sees another solid number, coupled with a likely more constructive outlook for Brent crude,” noted analysts at Citi.

“This makes CAD a ‘buy on dips’ vs USD, EUR, JPY and CHF. USDCAD ends the week below where the 55 and 200d MAs converge at 1.2526-36. Citi thinks this now raises the prospect of an accelerated move lower towards a strong horizontal support range at 1.2422-28.”

The dollar index, which measures the value of the dollar against six foreign currencies, was trading 0.45% higher at 92.446. Having fallen to a near-one-month low last week, the greenback rose ahead of the European Central Bank meeting this week.

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.

“The large miss in US headline jobs growth may be enough to delay the Fed taper announcement to Nov which likely supports a more positive risk backdrop to offset some of the current negatives such as China’s slowdown. It also means DXY can potentially retreat further to the lower end of its 91.28 – 93.44 range earlier than Q4 and a break if seen, is now likely to be to the downside,” Citi analysts added.

“The weekly close in DXY below the 55d MA converging with the corrective low from earlier this month at 92.47-50, now opens up the floor for extended losses possibly towards a triple support range at 91.75-83 (Sep 2020 low, Jul 2021 low, 55w MA).”