USD/CAD: Loonie Hits Over Two-Month Low on Strong Greenback, Weak Crude Oil Prices
The Canadian dollar hit its lowest level in over two months against its U.S. counterpart in early trading on Friday as the greenback hovered close to a 16-month low and crude oil prices slid on surplus jitters that weighed on the commodity currency.
Today, the USD/CAD pair rose to 1.2794 from Thursday’s close of 1.2648. After gaining about 2.3% last month, the Canadian dollar weakened by over 3% so far this month.
“With oil under pressure following reports that the US, China and other major oil consumers may be preparing to release crude oil reserves, CAD underperforms its peers,” noted analysts at Citi.
“Citi expects the BoC to start lifting rates by April 2022 though comments from BoC Governor Macklem, while suggesting the Bank is getting closer to lift-off, also warn that they have not changed their view on the transitory nature of inflation. Therefore, CAD still remains a buy on dips but more versus funders (EUR, JPY, CHF) than against USD and AUD.”
The dollar index, which measures the value of the dollar against six foreign currencies, was trading 0.60% lower at 96.198 – close to a 16-month high. Minutes of the U.S. Federal Reserve meeting confirmed market expectations that the Fed will raise rates sooner than other major central banks. The re-election of Jerome Powell as Federal Reserve Chair confirms market expectations that interest rates will go up next year. The Fed meets again December 14-15.
Last week, the greenback rose to 16-month highs 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.
“Yesterday’s closure of the US markets for Thanksgiving caused most FX pairs to trade within very tight ranges. Today, markets will reopen but only for half a day, and should see another fairly low-volatility session today,” noted Francesco Pesole, FX Strategist at ING.
“The general environment in FX remains remained quite supportive for the dollar, as the FOMC minutes and a bunch of good data kept market speculation on faster tapering and earlier tightening alive. On top of this, the worsening contagion situation in Europe and risk of fresh containment measures are generating further divergence in policy expectations between the ECB and Fed.”
Canada is the world’s fourth-largest exporter of oil, which edged lower on U.S. oversupply worries. At the time of writing, U.S. West Texas Intermediate (WTI) crude was trading 8.55% lower at $71.59 a barrel. Lower oil prices lead to lower U.S. dollar earnings for Canadian exporters, resulting in a decreased value of the loonie.
GDP by income and expenditure data for the third quarter of 2021 will be released on November 30, 2021. A rise of 0.5% was reported in Q3 2021 after a decline of 0.3% in Q2.
This article was originally posted on FX Empire
