Loonie hits one-week low on weak oil prices; Fed Eyed Policy Decision

“We continue to forecast the USDCAD to rise to 1.20 through the second half of 2022, although the kind of CAD strength we expected for year-end is now out of reach. We believe the CAD could rebound modestly again but maybe not more than 1.25 before the New Years. Note that our valuation model has reflected some of the recent slippages in the CAD, but still indicates a modest undervaluation of the CAD from spot levels near 1.27. We expect USDCAD gains in the 1.27 / 1.28 range to continue to attract short interest in USD. “

Today, USD / CAD 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. As of this writing, the dollar index, which measures the dollar’s value against six foreign currencies, was trading up 0.23% at 96.318.

On Wednesday, the Fed will likely announce an acceleration of its bond buying program. The Fed’s decision may also be influenced by data on consumer price inflation, which peaked in nearly 40 years 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 US Dollar Index Bullish Fund, which is designed for investors looking for a profitable and convenient way to track the value of the US dollar against a basket of the six major world 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 sooner 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 world’s dominant reserve currency, 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 earlier than expected, the USD / CAD pair could see a rise.

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

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Felix J. Dixon