Investing.com – The Canadian dollar rebounded against its U.S. counterpart on Thursday today, supported by a risk on mood in the midst of earnings, and as traders digested Fed commentary following yesterday’s interest rate decision.
The Fed signalled that it was willing to wait for further signs of subsiding inflation before moving to cut rates, dashing hopes of a rate cut in March. Markets now expect interest rate cuts to begin in May.
However, Powell also said that rates had peaked, and would move lower in the coming months, keeping risk aversion at bay.
Data today showed that weekly Jobless Claims came in higher than expected, helping keep bets of a March Fed rate cut relatively high at around 40%.
The focus now shifts to tomorrow’s January Nonfarm Payrolls report as traders seek to further gauge the Fed’s next move.
Analysts at CIBC (TSX:CM) Capital markets note that the repricing of Fed expectations for further in the future is likely to pose a tailwind for the loonie in the medium term, and as the Canadian economy continues to face mounting signs of weakness.
CIBC Capital Markets analysts write, “As markets reprice Fed and BoC expectations in opposite directions, we see USD/CAD drifting up to 1.3800 in early spring.”
“The Loonie has been retracing gains made late last year, and will likely continue to depreciate over the first quarter as markets recalibrate central bank rate expectations.”
After springtime however, they expect a rebound in the Canadian dollar as “Broad USD weakness as the Fed prepares to start cutting rates should give the CAD a lift”.