USD/CAD: Loonie Extends Gains as Crude Oil Prices Rise on Supply Woes
The Canadian dollar strengthened against its U.S. counterpart, hovering near three-month highs on Tuesday as crude oil prices inched closer to $85 a barrel level on tight supply and higher demand.
Today, The USD/CAD fell to 1.2309, near the three-month high of 1.2334 hit last week – from Monday’s close of 1.2374. The Canadian dollar gained about 2.6% so far this month after depreciating around 0.5% in September.
Canada is the world’s fourth-largest exporter of oil, which edged higher on tight supply and higher demand. At the time of writing, U.S. West Texas Intermediate (WTI) crude was trading 0.70% higher at $83.02 a barrel – close to the highest since October 2014.
Higher oil prices lead to higher U.S. dollar earnings for Canadian exporters, resulting in an increased value of the loonie.
“USDCAD has chopped around key USD support (61.8% Fibonacci retracement of the June/August move up at 1.2365) over the past two sessions. Friday’s stalled move down raised the prospect of a mini recovery in the USD but the lack of any significant rebound so far today shows that the USD is struggling to gain any positive momentum,” noted Shaun Osborne, Chief FX Strategist at Scotiabank
“Indeed, short-term price signals rather suggest building downside risks for the USD again; USDCAD looks well-capped in the low 1.24 zone and the USD has pressured intraday support at 1.2365 over the course of Monday’s morning session. Shorter-term (intraday, daily) trend signals are aligned bearishly against the USD, which will dull the USD’s ability to rally now. We think the USD is likely to fall further if support at 1.2350 cracks in the next few days. Resistance is 1.2420 and 1.2450. We continue to favour fading minor USD gains”
A release of September’s inflation data on Wednesday, October 20 may help guide expectations for the Bank of Canada’s policy outlook.
“One topic that should attract increasing market interest is the Bank of Canada mandate, which is due for renewal by the end of this year. The topic of inflation targeting is obviously quite hot, and rising inflation has been quite central in the latest election’s debate. We are inclined to think the current inflation target (2%, with a +/- 1% tolerance band) will be renewed, although there is some speculation it could be made more flexible, like in the US,” noted Francesco Pesole, FX Strategist at ING.
The dollar index, which measures the value of the dollar against six foreign currencies, was trading 0.32% lower at 93.992. However, 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.
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 U.S. dollar strengthening and a possibility that the Federal Reserve will raise interest rates earlier than expected, the USD/CAD pair may experience a rise.
This article was originally posted on FX Empire
