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Canadian Dollar Weakens On Risk-Off Sentiment, Bank of Canada Likely Hold

Published 2023-10-18, 05:59 p/m
© Reuters.
USD/CAD
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By Ketki Saxena

Investing.com --The Canadian dollar weakened against its US counterpart as a downturn in market sentiment boosted the safe-haven US dollar and pressured the risk-sensitive loonie. 

US homebuilding data came in positive, boosting bets that the US Federal Reserve will keep interest rates higher for longer, sending Treasury yields higher. 

Canadian Housing Starts also came in better than expected, however, this had little impact on the CAD, as yesterday’s CPI print showed inflation cooling has investors betting on a hold from the Bank of Canada. Analysts at ING note, “The CAD OIS curve is pricing only 4bp ahead of the October meeting, meaning that a hold is a very well-telegraphed outcome and should not have a major impact per-se.”

Looking ahead for the pair,  “There are still around 15bp of tightening in the price to a [Bank of Canada] peak, and therefore some downside risks for CAD if new projections show a more benign path for inflation and/or worse growth outlook”. 

“Either way, USD/CAD should remain primarily driven by non-Canadian factors: the USD performance on the back of US data releases, geopolitical events and the connected implications for commodity prices and risk sentiment.”

On a technical level for the pair, analysts at FX Street note that the USD/CAD pair is likely to see further upside in the short and medium term.

“The pair is wrestling with a major trendline at around 1.3685, drawn by connecting the October 2022 and March 2023 highs, and this is likely to present tough overhead resistance. Ideally a decisive break is required to definitively put this ceiling in the rear-view mirror.”

“Despite the sideways primary trend, the intermediate and short-term trends are more bullish suggesting longs have their backs to the wind. This lends a bias to more upside, and if it were not for the major resistance line there would be a green light signaling ‘go’ – as it is it could prove a spoiler."

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