USD/CAD: Loonie Falls on Subdued Oil Prices; Further Downside Risks Remain

The Canadian dollar slipped against its U.S. counterpart for the third straight trading day on Tuesday as falling energy prices and a firm greenback weighed on the commodity currency.

Today, the dollar to loonie conversion rose to 1.2575, up from Monday’s close of 1.2509. The Canadian dollar had lost about 1% in July – the second biggest monthly drop since September 2020 and has weakened about 0.7% so far this month.

Canada is the world’s fourth-largest exporter of oil, which edged lower on rising concern that the new delta variant will derail the global economic recovery.  U.S. West Texas Intermediate (WTI) crude futures were trading 2% lower at $69.87 a barrel.

High oil prices lead to higher U.S. dollar earnings for Canadian exporters, resulting in an increased value of the loonie.

The dollar index, a measurement of the dollar’s value relative to six foreign currencies, was trading 0.4% higher at 92.008 at the time of writing. Still, not far from this month’s low of 91.782.

The dollar stalled its rally after the Fed highlighted that the interest rate hike is far away in its last week’s monetary policy decision. The U.S. central bank also did not give any hint about reducing its purchases of government bonds.

“The CAD is failing to find a lift from the generally softer USD tone or firmer crude oil prices.  US-Canada spreads remain in CAD-supportive territory.  Commodity prices broadly are mixed to slightly lower on the session but there is little else to explain the CAD’s underperformance,” noted Shaun Osborne, Chief FX Strategist at Scotiabank.

“Neutral/bullish—USDCAD has ground steadily higher since last Friday’s low near 1.2425 to return to the base of the sideways range that prevailed through late July at 1.2525/30.  This should be firm resistance for the USD and perhaps allow the CAD the opportunity to pick up some support and trade more in line with the rest of the majors.  Intraday weakness below minor channel support at 1.2480 should provide the CAD with some additional lift.  Gains through 1.2530 would, however, pave the way for a push on to the low 1.26s.”

However, the risk that the world’s dominant reserve currency, the USD, recovery over the coming year is high, largely driven by the Fed’s expectation of two rate hikes in 2023. A strengthening dollar and growing risk that the Federal Reserve would tighten its monetary policy earlier than expected would push the USD to CAD pair higher.