The USDCAD currency pair was trading up 24 pips at writing as the US dollar edged higher against its Canadian counterpart ahead of the FOMC interest rate decision. Investors expect the US Federal Reserve to hike interest rates by 50 basis points.
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The US dollar was weak across the board following yesterday’s weak inflation data, which many saw as the last straw that would make the Fed shift its aggressive monetary policy stance and hike rates by 50 basis points instead of the usual 75 basis points.
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While the dollar weakened against many of its peers, including the euro, British pound and Australian dollar, it was much stronger than the Canadian dollar due to multiple factors. First, North American traders bet the rate hike would favour the US dollar.
Furthermore, despite crude oil prices rallying for three consecutive days, they are still trading near their yearly lows hit three days ago amid weak global demand. Most investors expect the global economy to enter a recession next year, negatively impacting oil prices.
Therefore, the Canadian dollar’s weakness will likely stretch into next year, given that Canada is a leading oil exporter. The upcoming FOMC interest rate decision is crucial, given that it will be the last hike for the year.
The next Fed meeting is scheduled for February 2023, and the markets expect the Fed to hike rates by 25 basis points as the rate hiking cycle ends. Many believe the Fed may achieve the economic soft-landing that seemed so doubtful a few months back.
Meanwhile, the Canadian dollar’s performance will remain inextricably tied to the US dollar’s performance, given how much the two countries economies are intertwined. If the US economy enters a recession, the Canadian economy will suffer since the US is its largest export market.
The Canadian dollar will also benefit from the US dollar’s weakness, and any rally in oil prices could also boost the currency.
*This is not investment advice.
The USDCAD price chart.
The USDCAD currency pair was trading up 24.3 pips (0.18%) at writing ahead of the FOMC interest rate decision.
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