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Canadian Dollar weakens vs USD as U.S. CPI awaited; further CAD weakness expected

Published 2024-03-11, 06:05 p/m
© Reuters.
- - The Canadian dollar edged lower against its U.S. counterpart on Monday, as uncertainty ahead of the key U.S. CPI report this kept sentiment in check, pressuring the risk sensitive loonie. 

All eyes are now on tomorrow’s U.S. inflation report, as investors try to gauge when the U.S. The Federal Reserve will begin to cut rates, following last week’s Senate Testimony from Fed Chair Jerome Powell that had traders betting on rate cuts in June. 

The Bank of Canada meanwhile said last week that it  was too early to consider easing rates, as it held its benchmark rate steady at 5%. Market expectations are for BoC rate cuts to begin in July. 

While market expectations for the BoC to begin rate cuts after the Fed helped provide a headwind for the loonie last week, analysts at Monex Canada note that the Fed’s higher for longer stance could lead to loonie weakness in the longer term, as restrictive monetary policy continues to cool the Canadian economy. 

Monex analysts note that, “Whilst the BoC’s high for longer stance should offer some short term protection weighing against a CAD selling off, its negative growth impact sets up a dynamic where the loonie should consistently underperform.”

“Headline data prints have largely masked growing underlying weakness in the Canadian economy, something that is being ignored by the BoC with their high for longer stance, but a dynamic that is becoming increasingly apparent to markets.”

Market data too, shows that speculators appear to be becoming more bearish on the Loonie. 

U.S. Commodity Futures Trading Commission data shows that as of March 5, net short positions on the Canadian dollar had increased to 19,837 contracts from 1,378 in the prior week.

Looking ahead for the pair, analysts at MonexCanada note “while USDCAD is currently trading below levels we think reflect underlying fundamentals, we expect ongoing loonie weakness is likely to be a theme over coming weeks, with CAD likely to remain an underperformer amongst G10 FX.”

On a technical level for the pair, analysts at FXStreet note, “The pair continues to trade into the middle of a rough range since rising into the 1.3500 region in January.”

“A downside break into 1.3400 opens the Loonie to further declines toward late 2023’s lows near 1.3200, while the immediate near-term ceiling sits at the 1.3600 handle.”

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