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Loonie weakens on slumping oil and CPI disappointment

Loonie weakens on slumping oil and CPI disappointment

Loonie weakens on slumping oil and CPI disappointment

  • The CAD fell to its lowest level since early October last week, trading in the mid-1.26s for a fourth consecutive weekly decline, extending from a month ago's test of 1.23. The CAD fell as a result of a 5%+ drop in WTI oil prices and last week’s CPI announcement, which may have disappointed traders expecting a stronger print. The possibility of extensive COVID-19 limitations and lockdowns in Europe, as well as a major drawdown in US strategic petroleum reserve inventories, contributed to a $4/bbl+ slump in WTI oil (its largest weekly drop since August).
  • Last week, Statistics Canada reported a 4.7 percent year-over-year increase in headline CPI, which met economists' expectations but disappointed markets after recent stronger-than-expected readings from the UK and the US had raised the possibility that Canadian data would also beat—increasing odds that the Bank of Canada could increase rates in March or April of 2022.

The week ahead:

  • Risk-sensitive currencies, such as the Canadian dollar, may trade on the defensive as more viral lockdowns are announced in the coming days and weeks while falling oil prices add to the drag. The release of the FOMC meeting minutes on Wednesday may cause a reaction in the broad USD tone, as it will inform expectations for rate hikes in 2022 as well as President Biden's decision on who will lead the Fed next year. Market activity will be constrained on Thanksgiving Day in the United States leading to thin volumes toward the latter part of the week.
  • While the fundamentals of CAD are positive, technical considerations are pointing to more losses in the near future. The pair could target 1.27 in the days ahead.

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