By Ketki Saxena
Investing.com -- The Canadian dollar was little changed against its U.S. counterpart on Friday, close to a near two-month high. The Canadian currency closed the week up 0.6%, marking its second consecutive week of gains.as investors continue to anticipate another Bank of Canada (BoC) rate hike, despite unexpected declines in domestic job numbers.
Shaun Osborne, chief currency strategist at Scotiabank (TSX:BNS), notes "The primary driving force behind CAD's gains is undoubtedly Wednesday's BoC rate tightening event; this decision was fueled by persistent demand and unwavering inflation pressures that policymakers are evidently concerned about becoming more deeply rooted above 2%"
Last Wednesday, the BoC raised its benchmark interest rate by 25 basis points to reach a new high not seen in over two decades – now standing at a two-decade high of 4.75%. Money markets predict approximately a 60% likelihood of yet another rate hike materializing in July - despite today's weaker-than-expected jobs data.
In May alone, Canada's economy lost as many as 17,300 jobs - falling significantly short compared with forecasted estimates which anticipated an increase totaling around +23,200 positions, while unemployment rates rose for the first time in nine months.
Osborne notes, "Friday’s softer than expected jobs data trimmed CAD gains to some extent but behind the first decline in employment in eight months were data points suggesting the labour market remains tight and wage gains remain strong (and incompatible with the BoC achieving its inflation goals). The door is open to more rate tightening."
The Canadian dollar was somewhat pressured by the price of crude, as disappointing data from China provoked skepticism regarding future demand growth.
However, Osborne notes that the Canadian dollar "remains undervalued from a fundamental point of view (estimated equilibrium is 1.3060 today) and relevant drivers across the correlation matrix (commodities rather than spreads, interestingly) are CAD-supportive."
On a technical level for the pair, Scotiabank's "Week ahead model anticipates a 1.3265/1.3540 range for funds next week but that perhaps skews risks to much to the topside, all else equal... USDCAD rebounds are liable to attract firm selling interest around the 1.34 zone."