By Ketki Saxena
Investing.com -- The Canadian dollar gained against its US counterpart today, despite a widening domestic trade deficit that analysts point to spelling further weakness in the Canadian economy.
Canada's trade deficit increased to $3.73 billion in June from May, the largest deficit in nearly 3 years, as exports dropped 2.2%, outpacing a 0.5% decline in imports, data showed. Analysts in a Reuters poll had forecast a trade deficit of $2.90 billion.
The commodity-linked loonie was supported by a mid-day reversal in crude prices, as the U.S. Energy Information Administration revised its forecast for the US economy upwards; the EIA now expects US GDP to rise by 1.9% in 2023, up from 1.5% in a previous forecast.
The US dollar meanwhile also gained against a basket of major currencies as investors sought the safe-haven greenback as risk sentiment soured, driven by disappointing Chinese growth data, and cuts from ratings agency Moody's to US small and mid size banks.
China's imports and exports fell much faster than expected in July, with imports down 12.4% from a year earlier. Exports meanwhile contracted by 14.5%.
Moody's meanwhile, cut credit ratings on several smaller U.S. banks and also raised warnings of possible further downgrades on larger lenders as banking credit strength comes under pressure from funding risks and weaker profitability.
On a technical level for the pair, analysts at Forex.com recommend traders "Look to reduce long-positioning / rase protective stops on a stretch towards the yearly open. Pullbacks should be limited to the 1.33-handle for the long-bias to remain viable with a breach above 1.3568 needed to fuel the next leg higher."
Looking ahead for the pair, analysts at MUFG note, that their "short-term valuation model that incorporates the impact of moves in yield spreads, risk sentiment and energy prices are currently signalling that USD/CAD should be trading closer to the 1.3000 level."
On a fundamental level, they note that "The likelihood of a softer landing in the US has increased recently which poses downside risks for our USD/CAD forecasts in the year ahead."
"We are assuming a high risk of recession/sharp slowdown for the US economy that helps lift USD/CAD."