Canadian Dollar Weakens As Oil Prices Fall, US Dollar Remains Strong

After the Canadian dollar selloff,  the dollar gains traction today as WTI oil prices return to the 80 levels. Other commodity currencies are also weak, with the Australian dollar being dragged down by disappointing employment figures. On the other hand, the dollar has remained stable, with no evident signs of losing momentum. The yen is also doing well, as it continues to try to gain ground in cross markets. Despite the EU’s upgrading of Eurozone inflation expectations, the euro is now mixed.

WTI crude oil has begun another downward leg inside the consolidation pattern that began at 85.92. There may be some fall, but firm support around 78.54 will almost certainly deliver a rebound. A sustained break of 78.54, on the other hand, will at least result in a deeper pullback to correct the gain from 61.90. In that event, we may see an increased selling in the Canadian Dollar.

Following a robust rebound on Wednesday, prompted by higher-than-expected rises in consumer prices, the dollar remains steady versus a basket of key foreign currencies, extending its climb to a fresh 16-month high on Thursday.

After statistics showed US inflation rose at the greatest annual rate since 1990 last month, the dollar index jumped about 1% (the biggest one-day gain in 2021), fueling anticipation that the Fed will respond by hiking interest rates sooner than expected and ahead of other major central banks. The greenback’s upward momentum was aided by the Fed’s new hawkish view on policy expectations, as the US currency had already benefited from other G10 central banks’ recent dovish stance.

Canadian Dollar Loses Appeal As the USDCAD Trades Rapidly Upward

On Thursday, the USD/CAD is witnessing some much-needed outperformance. The US dollar rose against the majority of its G10 rivals following a considerably stronger than expected US Consumer Price Inflation (CPI) report on Wednesday, although the loonie was mostly spared at the moment.

The pair was eventually able to break to the north of the major region of resistance during the session, and has since blasted above the 1.2500 level and is currently closing in on the 1.2600 mark. Oil prices fell dramatically on Wednesday, as investors worried that rising US inflation will force the Biden administration to release crude oil stockpiles to battle rising energy costs. Though prices are somewhat higher on Thursday, they are still far from their pre-CPI data levels, thus crude oil weakness is one explanation for the loonie’s strong decline on Thursday.

Another factor for the loonie’s underperformance is that the Canadian dollar rate advantage over the US has been marginally diminished in the aftermath of the US CPI report (as traders up their bets on a more hawkish Fed in 2022). The yield on the US 5-year government bond jumped 14 basis points to 1.22 percent, while the Canadian 5-year rose 10 basis points and was unable to return beyond 1.50 percent. When compared to the Fed, the government bond and short-term interest rate (STIR) markets still price a far more hawkish BoC.