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USD/CAD: Loonie Remains Range-Bound Ahead of BoC Decision on Wednesday

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The Canadian dollar largely remained range-bound in lacklustre trade against its U.S. counterpart on Monday as investors await the Bank of Canada’s monetary policy announcement on Wednesday, where it may address market expectations of successive rate hikes next year.

“In our view, the rally in CAD is looking quite tired, and we expect to see more support in USD/CAD around the 1.2300 level. Most of the positives (BoC tightening, solid economic recovery, higher energy prices) appear in the price and our short-term fair value model currently shows a 1.5% undervaluation in USD/CAD,” noted Francesco Pesole, FX Strategist at ING.

Today, the USD/CAD fell to 1.2336, not far from the nearly four-month high of 1.2287 hit last week – from Friday’s close of 1.2367. The Canadian dollar gained about 2.5% so far this month after depreciating around 0.5% in September.

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

“The Bank of Canada meeting week might prove to be a catalyst for an upside correction in USD/CAD. As discussed in our BoC preview, we do expect the Bank to deliver another round of tapering – cutting weekly purchases from CA$2bn to CA$1bn – but that is a move that is likely fully priced in. The main market focus will most likely be on the forward-looking language, and here we suspect that the Bank may simply reiterate they expect the first hike in 2H22, hence falling short of the market’s aggressive tightening expectations, which are fully pricing in an April hike and see an 80% probability of a March hike,” ING’s Pesole added.

“With the USD correction now past us, in our view, we see the balance of risks clearly tilted to the upside for USD/CAD. August GDP data released two days after the BoC meeting may provide only a small help to CAD.”

Canada is the world’s fourth-largest exporter of oil, which edged higher on supply and storage tightness. At the time of writing, U.S. West Texas Intermediate (WTI) crude was trading 1.13% higher at $84.71 a barrel. Higher oil prices lead to higher U.S. dollar earnings for Canadian exporters, resulting in an increased value of the loonie.

The dollar index, which measures the value of the dollar against six foreign currencies, was trading 0.21% higher at 93.837. 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 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