USD/CAD: Loonie Weakens Slightly After Hitting Nearly 4-Month High; BoC in Focus Next Week

The Canadian dollar weakened slightly against its U.S. counterpart after hitting a nearly four-month high on Thursday but strong greenback and crude oil’s ongoing roller coaster ride could add volatility to the commodity currency.

“USD/CAD is finding some consolidation in the 1.23/1.24 area after a marked correction from the 1.27 level where it used to trade at the end of September. The move has been in line with the rally in other commodity currencies, which was exacerbated by the sharp rise in energy prices,” noted Francesco Pesole, FX Strategist at ING.

“Domestic factors have also contributed, as the data flow has proven particularly supportive for the loonie, as a tighter jobs market and rising inflation kept strengthening the case for more Bank of Canada tapering.”

Investors will closely watch the Bank of Canada’s next monetary policy decision, which is scheduled for October 27.

“As discussed above, we expect the BoC to taper asset purchases again next week and in December, formally ending QE by the end of 2021. We think this is very much in the price, and we doubt CAD can receive any significant lift from the tapering announcement next week. Any material FX impact from the BoC announcement will likely rely on the degree by which the BoC will address the current market expectations that see a first 25bp rate hike almost fully priced in for the April 2024 meeting,” ING’s Pesole added.

Today, the USD/CAD fell to 1.2287, strongest since June 28- from Wednesday’s close of 1.2319. The Canadian dollar gained about 2.8% so far this month after depreciating around 0.5% in September.

Canada is the world’s fourth-largest exporter of oil, which edged lower China considers intervention to ease coal crunch. At the time of writing, U.S. West Texas Intermediate (WTI) crude was trading 0.66% lower at $82.79 a barrel. Lower oil prices lead to lower U.S. dollar earnings for Canadian exporters, resulting in a decreased value of the loonie.

The dollar index, which measures the value of the dollar against six foreign currencies, was trading 0.09% higher at 93.640. The U.S. dollar has gained across most currencies in the last few weeks as investors have become concerned the Fed may withdraw its economic support due to slow global growth and high inflation.

“DXY remains trapped within a 93.44 to 94.65-79 range, with still lingering US debt ceiling concerns mildly supportive (debt ceiling has been extended but not fully resolved) while the energy spike is more mixed news for DXY – neutral vs commodity/ energy importers (EUR, CHF, JPY, CNH) but a weaker USD versus commodity/ energy exporter currencies led by CAD and AUD and vs GBP,” Citi analysts added.

“DXY’s struggle to break above a pivotal resistance range at 94.65-79 but at the same time, a weekly close below the Aug 2021 high and potential double top neckline at 93.68 is needed to see DXY drop back below the major double bottom neckline at 93.44 once again.”

Investors were concerned that increasing inflationary pressures could pose a headwind to the economy and affect how soon the Federal Reserve may be able to raise rates. Rising bond yields have contributed to the strengthening of the currency.

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.