By Ketki Saxena
Investing.com -- The Canadian dollar rallied to a new 2023 high against its US counterpart today, in the aftermath of the Bank of Canada's (BoC) decision to raise interest rates by a quarter percent and its open-ended forward guidance, and as the US disinflation narrative gained strength.
Following US CPI data yesterday that showed a cooldown, today's June Producer Price Index (PPI) reading further accelerated the USD/CAD pair sell-off as it substantiated narratives about dwindling U.S. inflation and hinted at an imminent peak rate.
PPI figures took a nosedive from previous year-on-year statistics falling from 0.9% to just 0.1%, significantly below projected estimates of around 0.4%.
This data reinforces market speculations that suggest only one more rate increase by the Federal Reserve might occur within this year.
Looking ahead, however, a number of analysts including TD (TSX:TD), Scotiabank (TSX:BNS), Nomura and Macquarie remain bearish on the loonie in the medium term, anticipating CAD weakness in the face of US economic resilience.
"Our bearish view for second half of '23 is based on our belief that Canada will face harsher economic downturn than America," said Thierry Wizman, global currencies and interest-rate strategist at Macquarie Futures USA.
"The rate hike has already taken place and households are likely to feel financial pressure as fixed-rate mortgages roll over into higher rates."
ING, however, differs and is in the minority on taking a bullish view on the CAD looking ahead.
"The additional hike implemented by BoC without any resistance towards future advancements means that CAD can continue reaping benefits from an attractive carry."
"It is important not to forget that Loonie boasts having best volatility-adjusted carry among G10 currencies space; we don't necessarily foresee this as commencement of broader USD downtrend but close correlation between USD/CAD implies that CAD possesses better protection against potential USD rebound compared to other pro-cyclical currencies."
On a technical level for the pair, analysts at Forex.com note, "USD/CAD is once again testing key pivot zone with a more significant technical confluence seen just lower at trend support. From at trading standpoint, look to reduce short-exposure / lower protective stops on a stretch towards the 1.30-handle – rallies should be limited to 1.3225 IF price is heading lower."
"Keep in mind that the trend has matured on this stretch and ultimately, we are on the lookout for a possible exhaustion-low / price inflection on a test of trend support in the weeks ahead."