Canadian Dollar Underperforms Following U.S. Inflation Print

(Bloomberg) -- The Canadian dollar underperformed its Group-of-10 peers against the greenback on Friday after oil pared gains and may have room to fall further as the fastest U.S. inflation in nearly 40 years prompts the Federal Reserve to tighten monetary policy.

It’s been a volatile week for the loonie, rallying the most in more than two months on Tuesday as optimism the omicron variant won’t derail global growth fueled a rally in stocks and helped send crude prices back above $70 a barrel in New York. The loonie has slipped since Wednesday’s Bank of Canada meeting, when policy makers failed to signal an interest-rate hike was imminent. 

Falling commodity prices and souring global risk sentiment are two of the potential headwinds to a move higher in the Canadian dollar in 2022, Bank of America strategist Ben Randol wrote, and the bank sees short-term risk skewed to a potential move in the dollar-loonie to 1.30. That’s a level not seen since November 2020 and represents a climb of more than 2% from the pair’s current level.

Still, Randol said they would fade the pair from there and expect a move lower to 1.20 in the second quarter of 2022. 

“The BoC remains on track to preemptively lift rates in 1Q, likely serving as a source of USDCAD downside pressure, according to history,” Randol wrote. “Our commodity strategists are constructive,” expecting West Texas Intermediate to average $82 a barrel next year, likely serving as a terms-of-trade and structural flow tailwind, he said.

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