Despite broad-based USD strength, the Canadian dollar rallied against its US counterpart today, gearing up to retest its highest level this year as market participants increase bets that the Bank of Canada will recommence raising interest rates.
Odds for a 25 basis point hike at June's meeting have climbed to one-in-three – their peak since early March – following Tuesday's unforeseen surge in Canadian consumer inflation rate. Markets are now largely pricing in another rate hike by October, a marked turnaround from predictions of cuts by year-end just two weeks prior.
"We still need to see more data to say that another hike by July is certain, but the risks have shifted," said Bipan Rai, a currency strategist at Canadian Imperial Bank of Commerce. "The debt ceiling noise will maintain the floor on USD/CAD at around 1.33 for now."
Since January, Canada’s policy rate has remained unchanged at 4.5%, with Governor Tiff Macklem and his team maintaining it for two consecutive meetings last month, with the next meeting set to take place on June 7th. Should the loonie's appreciation lead to changes in futures positioning, this floor could be reached sooner than anticipated.
Recent data from the Commodities Futures Trading Commission reveals that net short positions in the currency have fallen from a four-year high.
The commodity linked loonie was also supported by gains in crude prices, which received a boost from optimism around debt ceiling talks and after the release of the EIA report showing US oil production declined from 12.3 million bpd to 12.2 million bpd.
The US dollar meanwhile rose to a seven-week high as investors hoped a deal to extend the debt ceiling would help avert a U.S. default.
On a technical level for the pair, analysts at FX Street note, "In case USD/CAD settles below the support at 1.3450, it will head towards the next support level at 1.3410. On the upside, a move above the resistance at 1.3490 will open the way to the test of the resistance at 1.3530"