The Canadian dollar appeared set to reverse a multi-week decline on Friday, trading near C$1.4170 per U.S. dollar - roughly 70.57 U.S. cents - as the U.S. dollar eased and crude oil strengthened. Market data around the morning session showed the U.S. dollar down about 0.13% against the Canadian currency on the day.
The recent retreat in the U.S. dollar followed remarks from Federal Reserve Chair Kevin Warsh that reinforced investor expectations policymakers might leave interest rates unchanged at their October meeting. That softer greenback has supported the Canadian dollar by lowering the cost for investors to acquire the loonie.
Domestic factors that had weighed on the Canadian currency remain relevant. Employment figures released last week weakened markets' assumptions that the Bank of Canada would raise rates, a development that pushed the loonie to an 18-month low. The currency’s recovery this week reflects a reassessment of both global and domestic interest-rate prospects.
Oil provides additional backing
Crude prices offered further support for the loonie. Brent crude was trading up about 1.4% for the week at $106.28 a barrel, while U.S. West Texas Intermediate crude had gained 6.4% to $97.78. The upward pressure on oil came amid concerns about supply disruptions in the Middle East and a sharp drawdown in U.S. crude inventories.
Because Canada is a major energy exporter, the loonie is sensitive to movements in crude, though broader U.S. dollar swings and changing interest-rate expectations can counteract oil’s influence at times.
Weekly performance and market context
The U.S. dollar-Canadian dollar exchange rate was down roughly 0.6% from its Oct. 9 close of C$1.4257, putting the Canadian currency on course for a weekly gain of about 0.6%. That would reverse the prior week’s decline, when the loonie lost 0.2% and recorded its fifth consecutive weekly loss.
Investors were also parsing fresh U.S. inflation signals. Producer prices rose 1.3% in September, the largest monthly increase in four-and-a-half years, a development that has amplified concerns that elevated energy costs could sustain inflationary pressures. Those inflation data are part of the mix influencing expectations for U.S. monetary policy and, by extension, currency markets.
Outlook
Short-term movements in the Canadian dollar appear to be shaped by three primary forces cited by market participants this week: the direction of the U.S. dollar and U.S. interest-rate expectations following Fed commentary; changes in crude oil prices driven by supply concerns and inventory shifts; and the lingering effects of Canadian employment data on Bank of Canada tightening prospects. How these elements interact over coming sessions will determine whether the loonie’s advance is sustained.