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Canadian Dollar Marginally Weaker Ahead of Bank of Canada Announcement; US CPI

Published 2023-07-10, 05:43 p/m
© Reuters.
USD/CAD
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By Ketki Saxena

Investing.com -- The Canadian dollar weakened against its US counterpart today, as investors await crucial data this week, including US Consumer Price Index (CPI) data and an impending rate announcement by Bank of Canada. Markets are largely anticipating another 25 bps from the BoC up to 5%, given persistent positive inflation and a robust labour market.

The risk-sensitive loonie was pressured by negative investor sentiment, also reflected in equities.

The commodity-linked Canadian dollar is feeling additional pressure due to fluctuations in crude prices on concerns about potential 'demand destruction' triggered by Federal Reserve hikes coupled with signs of weakening economic data emerging from China.

On a fundamental level for the pair, financial services company Nomura noted that they remain long USD/CAD, citing three key reasons.

1) An anticipated softening in Canada's terms-of-trade ratio - a metric that compares export prices with import prices. The trend implies falling prices for Canadian exports relative to its imports – a development that could potentially affect negatively the domestic economy and consequently on CAD value.

2) Nomura also notes that real money investors are likely nearing completion of their short covering activities – essentially buying back assets they previously sold short anticipating price drops. With less short-covering expected going forward, support for CAD through buying pressure may decrease further.

3) The Nomura analysis also notes that a robust US economy could adversely impact high-beta G10 currencies like the Canadian dollar. High-beta currencies are often more volatile & sensitive to changing market conditions than others. As long as US economy demonstrates resilience, it might draw investments away from riskier high-beta currencies including CAD.

On a technical level for the pair, analysts at FX Street note, "After failing to clear above Fibonacci resistance and the 50-day simple moving average around the psychological 1.3400 handle, USD/CAD began to dribble lower, with the pair now probing technical support in the 1.3265 area. "

"While prices could bottom out and establish a base around these levels, a breakdown could reinforce weakness and set the stage for a move toward 1.3200, followed by a possible retest of the 2023 lows."

"On the flip side, if USD/CAD manages to rebound off support, overhead resistance stretches from 1.3390/1.3410. Upside clearance of this barrier, however, could create the right conditions for a rally towards 1.3450."

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