USD/CAD: Loonie Gains After Trudeau Wins Third Term; FOMC in Focus

The Canadian dollar snapped its three-day losing streak against its U.S. counterpart on Tuesday after Trudeau was re-elected to a third term in a snap election but wasn’t able to gain a majority.

The USD/CAD pair fell to 1.2738 today, down from Monday’s close of 1.2825. The Canadian dollar lost over 1.2% last month and further depreciated over 1.7% so far this month.

Having failed to win a majority in Monday’s parliamentary elections, Justin Trudeau admitted he must work with other parties. This again leaves him dependent on opposition lawmakers to govern. Early this month, in the event of a Liberal victory in the federal election, Trudeau’s party pledged CAD78 billion in new health investments over five years.

“Increasing concerns about the persistence of domestic elevated inflation and prospect of BoC’s goal of absorbing around 350k job gains insight could see the BoC start to consider signalling rate rises as early as by H1’2022. Together with Citi’s expectations for Brent crude to trade higher in Q4 (USD75-80), this could make CAD the “buy of the quarter in Q4” vs USD, EUR, JPY, CHF. USDCAD is struggling to break below strong support at 1.2555-79. A decisive break below this range is needed to open up for extended losses towards the double lows from Jul’21 at 1.2422-28,” noted analysts at Citi.

Canada is the world’s fourth-largest exporter of oil, which edge lower as production in the Gulf of Mexico slowly returns. U.S. West Texas Intermediate (WTI) crude futures were trading 0.24% lower at $70.12 a barrel. Lower oil prices lead to lower U.S. dollar earnings for Canadian exporters, resulting in a decreased value of the loonie.

“As we have noted over the recent past, the underlying USD trend has been tilting more bullish, despite the block on USD progress in the 1.2750/60 zone last week. The rapid USD advance over the past three days (including today) does look a little stretched in the short run and we do not exclude the risk of some USD back and filing in the near-term on account of that, the more so as the USD has already traded well off its early Monday high,” noted Shaun Osborne, Chief FX Strategist at Scotiabank.

“But we think solid, bullish USD trend momentum—DMI oscillators are aligned positively for the USD across the intraday, daily and weekly charts—points to limited scope for USD counter-trend corrections (low/mid 1.27s) and ongoing upside pressure on the USD towards 1.2950; gains through the low 1.30s would point to additional scope for gains towards 1.33 in the next few weeks.”

The dollar index, which measures the value of the dollar against six foreign currencies, was trading 0.06% lower at 93.219. The dollar reached a one-month high on Monday, boosted by recent strong economic data and speculation regarding Fed tapering. Fed policymakers will meet today and tomorrow and would open discussions about reducing their monthly bond purchases are expected.

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 two rate hikes by the Fed in 2023. 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

More From FXEMPIRE:

• Silver Price Forecast – Silver Markets Holding Onto Support Level

• Natural Gas Price Forecast – Natural Gas Markets Continue to Pull Back

• S&P 500 Price Forecast – Stock Markets Test Previous Trendline

• Natural Gas Price Prediction – Prices Fall as Momentum Turns Negative

• Bitcoin Update: A Revisit of $29,000 Cannot be Excluded Just Yet

• Stocks Rebound As Traders Rush To Buy The Dip