The Canadian dollar (CAD) edged lower against the U.S. dollar (USD) on Friday but still posted its biggest weekly gain since June. The loonie traded at 1.3521 to the greenback, down 0.1% from Thursday.
The surge in oil prices played a pivotal role in bolstering the Canadian dollar’s performance. Crude oil soared to a 10-month high, reaching an impressive $91.19 per barrel on Friday.
Given that oil ranks as a cornerstone of Canada’s exports, it’s no surprise that such robust prices lent strong support to the CAD last week. This bullish trend in oil can be attributed to Saudi Arabian production cuts and renewed optimism surrounding Chinese demand.
Adding to the CAD’s strength was the Euro’s (EUR) notable weakness. The EUR stumbled after signals from the European Central Bank (ECB) suggested a pause in its interest rate hike cycle. This development triggered considerable selling pressure on the EUR-CAD pair, as explained by Amo Sahota, Director at Klarity FX in San Francisco, in a note to Reuters.
Looking Ahead for the Canadian Dollar
Looking ahead, the Canadian dollar faces a mixed bag of challenges and opportunities in the coming week. Investors are closely eyeing two pivotal events: Canada’s inflation report and the U.S. Federal Reserve’s policy decision.
Economists anticipate Canada’s consumer price index to reveal a year-on-year inflation increase to 3.8% in August, up from July’s 3.3%. Meanwhile, the Fed is widely expected to maintain its benchmark interest rate at 5.25%–5.50%, but speculation is rife about hints regarding future plans.
It’s worth noting that the interest rate differential between Canada and the U.S. has recently tilted in favor of the USD. Canada’s 2-year yield has dipped below its U.S. counterpart by approximately 30 basis points, potentially posing headwinds for the CAD. Historically, higher yields tend to attract more capital flows, influencing exchange rates.
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