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USD/CAD: Loonie Snaps Three-Day Winning Streak But Set to End Week Strong

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The Canadian dollar snapped its three-day winning streak against its U.S. counterpart on Friday, but the commodity currency is set to end the week higher for the fourth consecutive time, thanks to surging crude oil prices.

Today, the USD/CAD fell to 1.2334 – highest since July 6 – down from Thursday’s close of 1.2469. The Canadian dollar gained about 2.3% so far this month after depreciating around 0.5% in September. If loonie is successful in ending the week higher, it would mark the fourth consecutive week of gains.

“Positive CAD momentum suggests a return to 1.22 area remains viable. The CAD is having a good October. It has posted a solid, 2.5% gain on the USD so far and has outperformed all of its major peers bar the NOK. The JPY is down 5% against the CAD so far in the month. Those two facts partially explain what is driving the CAD. The NOK is benefitting from the lift in energy prices and, like the CAD, enjoying a commensurate term of a trade boost. Meanwhile, the JPY is being punished for Japan’s status as a major importer of raw materials and energy products and the resulting decline in domestic terms of trade in response to strong commodity prices,” noted Shaun Osborne, Chief FX Strategist at Scotiabank.

“Technically, the CAD is poised to close out the week a little off its best but potentially at, or just below, key retracement support at 1.2367 (61.8% Fibonacci retracement of the Jun/Aug rally).  There is little clear support for the USD below this point until the low 1.22 zone (76.4% retracement at 1.2230).  If the USD manages to steady around 1.2365/70 into next week, a modest correction could develop.  We expect USD gains to remain limited to the low/mid 1.24s, however, with daily and weekly trend momentum signals aligned bearishly for the USD.  We think spot can print a 1.22 handle ahead of year-end.”

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 over 1% higher at $82.49 a barrel – 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.

The dollar index, which measures the value of the dollar against six foreign currencies, was trading 0.04% higher at 93.992. 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.

“The dollar has given up some of its recent gains this week, but we are reluctant to see this as a signal that the bullish sentiment on the greenback is abating. It appears more likely that the modest correction was triggered by some profit-taking on long dollar positions as markets now fully price in the start of Fed tapering by year-end and the first hike in September/November 2022,” noted Francesco Pesole, FX Strategist at ING.

“While we don’t think the dollar downward correction has legs, we may have to wait for the next week to see the greenback re-join its upward trend, and DXY could close the week around the 94.00 level.”

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