USD/CAD declines towards weekly low at around 1.3340 ahead of BoC’s interest rate policy

• USD/CAD is looking to extend its downside towards a weekly low around 1.3340 amid the risk-on market mood.
• The BoC is expected to hike interest rates further by 25 bps to 4.50% this week.
• Oil prices might deliver a recovery amid optimism over China’s economic recovery.

The USD/CAD pair has dropped to near 1.3367 gradually in early Asia after failing to shift its auction above the round-level resistance of 1.3400. The Loonie asset is expected to stretch its downside journey to near the weekly low around 1.3340 as the risk-taking capacity of the market participants has improved.

The risk appetite theme solidified amid easing recession fears in the United States on expectations of a smaller interest rate hike by the Federal Reserve (Fed) next week. S&P500 witnessed a decent buying interest on Monday, supported by a recovery in tech-savvy stocks. Meanwhile, fading risk aversion among the market participants could propel further sell-off in the US Dollar Index (DXY).

The USD Index is hovering near the lower end of its trading range in the 101.56-101.87 territory. The alpha generated by the US government bonds is still solid as terminal rate projections have not trimmed despite continuous inflation softening. The 10-year US Treasury yields have extended above 3.52%

On the Loonie front, investors are awaiting the announcement of the interest rate decision by the Bank of Canada (BoC), which is scheduled for Wednesday, for fresh cues. Canada’s inflation is declining gradually and has dropped to 6.3% but is still beyond the 2% inflation target, therefore expectations of a further hike in the interest rates cannot be ruled out.

According to a poll from Reuters, BoC Governor Tiff Macklem’s aggressive policy tightening campaign is expected to calm further as the street sees a further interest rate hike by 25 basis points (bps) to 4.50%. On the oil front, the oil price has witnessed selling pressure after failing to overstep previous week’s high at $82.50. The upside bias is still solid as China’s economic recovery is expected to keep oil demand at elevated levels. It is worth noting that Canada is a leading exporter of oil to the United States and the higher oil price will provide support to the Canadian Dollar.