USD / CAD: Loonie hits one-week low on weak oil prices; Fed Eyed Policy Decision

The Canadian dollar hit its lowest level in a week against its US counterpart at the start of Monday’s session as low crude oil prices weighed on the commodity currency; Investors also braced for the Federal Reserve’s policy announcement on Wednesday, where it is expected to broadly signal an early end to its asset purchases.

“The GOUJAT ceded some of its solid gains earlier in the week following the BoC’s policy move amid consolidation of oil prices below $ 75 as well as new concerns over the Omicron variant weighing on the feeling of risk. Note that our correlation studies show that the CAD the link with energy and stocks grew stronger last week, ”noted Shaun Osborne, chief forex strategist at Scotiabank in his December 10 memo.

“We continue to plan USDCAD rising to 1.20 until H2 2022 even if the type of GOUJAT the strength we expected at the end of the year is now out of reach. We believe that the GOUJAT could still recover modestly but maybe not more than 1.25 before New Years. Note that our valuation model reflected some of the recent slippages in the GOUJAT but still indicates a modest GOUJAT undervaluation from spot levels near 1.27. We are waiting USDCAD gains in the 1.27 / 1.28 range to continue to attract USD sell interest accordingly. “

Today the USD / CAD The pair rose to 1.2765 from Friday’s close at 1.272. the Canadian dollar hit its lowest level in more than two months last week. After gaining about 2.3% in October, the loonie weakened more than 3.1% last month.

Investors were eagerly awaiting the key Federal Reserve meeting later this week. At the time of writing, the dollar index, which measures the value of the dollar against six foreign currencies, was trading up 0.23% to 96.318.

On Wednesday, the Fed will likely announce an acceleration of its bond buying program. The Fed’s move may also be influenced by data on consumer price inflation, which hit their nearly 40-year high in November.

“The Fed’s concern will be that high inflation today may fuel expectations of higher inflation tomorrow and the day after and so on. This can then spill over into wage claims and into an environment. With decent pricing power, we see those costs spill over to customers, ”noted James Knightley, chief international economist at ING.

“The Fed will want to avoid this (or appear willing to tolerate it), hence our expectations for a faster reduction… with the program ending in February. We also expect them to signal the prospect of two rate hikes in their dot plot, up from what they currently have.

the Invesco DB Bull US Dollar Index Fund, which is designed for investors looking for a cost effective and convenient way to track the value of the US dollar against a basket of the world’s six major currencies – the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc – closed 0.15% lower at 25.75 on Friday.

“This week presents one of the last opportunities of the year for significant moves in the forex markets, as a host of central banks from both developed and emerging markets hold meetings. So far, it has been a good year for the US dollar, Canadian dollar and Chinese renminbi. Expect these trends to continue broadly, especially the strength of the US dollar, ”noted Francesco Pesole, FX strategist at ING.

The final minutes of the US Federal Reserve meeting confirmed market expectations that the Fed will hike rates earlier than other major central banks. The greenback is hovering near the 16-month high against most other major currencies due to the highest US inflation in a generation that has caused investors to bet interest rates will likely rise sooner than previously thought.

It is very likely that the dominant reserve currency in the world, the USD, will rise by the first quarter of next year, largely due to the expectation of at least one rate hike in 2022. With the dollar strengthening and the possibility that the Federal Reserve will raise interest rates sooner than expected, the USD / CAD pair may experience a rise.

Canada is the world’s fourth-largest exporter of oil, which has fallen slightly as the risks of the novel variant of the Omicron coronavirus weigh down. At the time of writing, US West Texas Intermediate (WTI) crude was trading down 0.63% at $ 71.21 per barrel. Lower oil prices lead to lower US dollar gains for Canadian exporters, leading to a decline in the value of the loonie.

This item was originally posted on FX Empire

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Steve R. Hansen