By Ketki Saxena
Investing.com -- The Canadian dollar weakened to a five-month low against its U.S. counterpart earlier today, with risk-aversion remaining dominant following weak Chinese data that showed that services activity expanded at its slowest pace in eight months in August.
The risk-sensitive loonie was also pressured by bets that the Bank of Canada has concluded its rate hike spree, and will hold rates at 5% at its monetary policy announcement tomorrow.
The commodity-linked loonie meanwhile gained some support from crude prices, which hit their highest since November after Saudi Arabia and Russia announced they would extend voluntary supply cuts to year-end.
Meanwhile, the safe haven US dollar climbed against a basket of major currencies as investors fled to safety.
On a fundamental level for the pair, analysts at ING note that their models show the Canadian dollar remains undervalued.
They note, "Our short-term valuation model, which includes swap rate differentials as an endogenous variable, shows that USD/CAD is trading more than 2% over its fair value, a rather unusual mis-valuation level for the pair. Incidentally, CFTC data shows that speculators have moved back into bearish positioning on the loonie in recent weeks, with net-shorts now amounting to 9% of open interest."
The two year swap rate differentials meanwhile remain relatively stable, "In the -50/-40bp range throughout August, and only tightened to -30/-35bp after Canada’s poor 2Q GDP report. "
Up next for the pair, all eyes will be on the Bank of Canada's decision tomorrow - but even more so on the forward guidance for indicators on what lies ahead after tomorrow's (likely) pause from the Canadian central bank.