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US Dollar to Canadian Dollar Exchange Rate Forecast: Oil Price Rally Could Cause Further USD/CAD Losses

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US Dollar to Canadian Dollar Exchange Rate Unable to Recover as Oil Prices Rise

Demand for the US Dollar (USD) improved in reaction to the latest Federal Reserve meeting minutes, but this was not able to help the US Dollar to Canadian Dollar (USD/CAD) exchange rate to recover from near its weekly lows.

USD/CAD looks to be on track for its second consecutive week of losses, as the pair has already seen a significant drop from the week’s opening level of 1.2784 to its current levels of near 1.2580.

Overnight, USD/CAD touched a low of 1.2562. This was the pair’s lowest level since February.

Prices of oil, Canada’s most lucrative commodity, have seen strong performance over the last week. It has been due largely to political tensions and uncertainties in the Middle-East. This has boosted the oil-correlated Canadian Dollar.

Concerns about potential clashes between the US and Syria, as well as issues in Saudi Arabia and Yemen, have caused investors to buy oil in a panic. According to Michael Hewson from CMC Markets UK;

‘With nerves already frayed sentiment wasn’t helped by reports that Saudi Arabian defence systems had intercepted a number of missiles fired from Yemen, over the skies of Riyadh, which in turn saw oil prices hit their highest levels since December 2014 above $73.’

US Dollar (USD) Exchange Rates Fail to Recover Despite Federal Reserve Hawkishness

Wednesday’s American session saw the publication of the Federal Reserve’s latest meeting minutes, which were overall optimistic.

The report showed that all Fed policymakers saw the US growth and inflation outlook as improving, and overall the tone indicated that the Fed was eyeing the possibility of a more aggressive path of US monetary policy.

This bolstered market speculation that the Fed could hike US interest rates four times in 2018, rather than the currently forecast three interest rate hikes.

However, recent US data has not been particularly impressive and this has given investors little reason to buy the US Dollar.

Wednesday saw the publication of US Consumer Price Index (CPI) results from March, which largely met expectations.

While US core inflation did rise from 1.8% to 2.1% as forecast, the overall monthly inflation figure unexpectedly contracted at -0.1%. This meant the report was not impressive enough to really bolster US Dollar demand.

Canadian Dollar (CAD) Exchange Rate Strength Limited by Domestic News

Federal Reserve hawkishness and some underwhelming Canadian news did help the US Dollar to Canadian Dollar (USD/CAD) exchange rate to slightly recover from its weekly lows on Thursday.

For example, while investors are generally confident that the renegotiation of the North American Free Trade Agreement (NAFTA) will succeed rather than collapse, there are still disagreements among officials.

The US has expressed confidence that the deal can be quickly completed, but as officials from the US as well as Canada and Mexico remain steadfast on some contentious negotiation positions, there are concerns that talks may still have a ways to go.

This week’s Canadian data has been underwhelming too. Thursday saw the publication of Canada’s new housing price index report from February, which unexpectedly contracted at -0.2% month-on-month.

US Dollar to Canadian Dollar (USD/CAD) Forecast: Bank of Canada (BOC) Next Week

Unless investors begin to find the US Dollar considerably more appealing tomorrow, the US Dollar to Canadian Dollar (USD/CAD) exchange rate is unlikely to recover all of this week’s losses and will most likely end the week lower.

Demand for the US Dollar may improve if Friday’s US consumer sentiment survey data from Michigan University beats expectations.

On top of this, the Canadian Dollar could weaken and make it easier for USD/CAD to advance if oil prices plunge, or if the perceived likelihood of a NAFTA deal being secured weakens further.

Overall though, unless risk-sentiment changes notably USD/CAD investors are more likely to anticipate key data due next week.

US retail sales stats will be published on Monday, but the Canadian Dollar could remain firm as investors await Wednesday’s Bank of Canada (BOC) policy decision.

The bank is expected to leave monetary policy frozen, but if the bank shows signs of hawkishness for 2018 monetary policy amid higher NAFTA optimism the Canadian Dollar could be in for another week of gains.