USD/CAD: Loonie Weakens as Greenback Hovers Near 16-Month High

FXEmpire.com -

The Canadian dollar weakened against its U.S. counterpart on Tuesday as the greenback hovered close to the 16-month high on increasing bets that the Fed would raise interest rates sooner than previously thought.

USDCAD settles Friday at 1.2550 and above the pivotal 1.2540 level, where the 55d and 100d MAs converge with the next major resistance seen at 1.2600. Like NZD however, CAD remains a buy on dips versus funders (EUR, JPY, CHF) in an environment where many have been expecting the BoC to push back on the aggressive market pricing following the recent softer Canadian October jobs report,” noted analysts at Citi.

“Citi still see April 2022 as the most likely timing for a first BoC rate hike with quarterly hikes to follow. But as market pricing is already in line with the Citi call scope for further hawkish surprises may be limited especially given exposure to medium-term weaker Chinese growth.”

Today, the USD/CAD pair rose to 1.2544 up from Monday’s close of 1.2511. After gaining about 2.3% last month, the Canadian dollar strengthened over 1.3% so far this month.

The dollar index, which measures the value of the dollar against six foreign currencies, was trading 0.19% higher at 95.590. 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.

In October, U.S. consumer prices rose faster than expected due to surges in gasoline and food prices, showing that inflation could remain high well into next year amid snarled global supply chains. Labor Department data on Wednesday showed that the consumer price index rose 0.9% last month after rising 0.4% in September. In the 12 months through October, the CPI increased 6.2% up from September’s 5.4% increase.

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.

The dollar index (DXY) may bid on front-end rate differentials especially vs funders (EUR, JPY, CHF) but with sharp DXY gains unlikely as the UST curve flattens, signalling market conviction that any Fed tightening is likely to be shallow,” added Citi analysts.

“This would still leave US financial conditions accommodative which limits the extent of DXY gains. DXY is so far sustaining above strong resistance at 94.65-83 that has held for the last seven weeks. The weekly close above now brings the double bottom pattern back in to play and suggests extended gains towards 97.50.”

Canada is the world’s fourth-largest exporter of oil, which edged higher on tight inventories. At the time of writing, U.S. West Texas Intermediate (WTI) crude was trading 0.64% higher at $81.4 a barrel. Higher oil prices lead to higher U.S. dollar earnings for Canadian exporters, resulting in an increased value of the loonie.

This article was originally posted on FX Empire

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