By Ketki Saxena
Investing.com -- The Canadian dollar reached a nine-month high in comparison to its U.S. counterpart, driven by increasing oil prices and evolving investor expectations regarding the highest interest rates this cycle from both the Bank of Canada (BoC) and the Federal Reserve. Over the course of one week, it saw a 1.1% increase—marking three consecutive weeks of gains.
Earlier this week, the Fed announced plans for two more rate hikes that would result in a policy rate between 5.50% and 5.75%. However, money markets are only accounting for a single additional hike at this time.
Meanwhile, investors anticipate that Canada's central bank will reach its peak benchmark rate around 5.10% within this year alone - posing a tailwind for the loonie. Last week, BoC raised rates by 25 basis points up to 4.75%, marking their first adjustment since January.
"There seems to be a greater degree of uncertainty with respect to the two terminal rates and that seems to be a pretty significant driver for the Canadian dollar at this point," as per analysts at CIBC (TSX:CM).
Fueling support for the loonie were rising oil prices due largely to robust Chinese demand as well as OPEC+ supply reductions.
On a technical level for the pair, analysts at Scotiabank (TSX:BNS) note, "In the very short run, the CAD may have realized its potential...Our week ahead model projects a 1.32/1.3465 range (75% confidence band). But more USD weakness is hard to rule out."
Looking ahead for the pair, they expect the "USD to soften broadly in H2 as the Fed cycle nears its peak and investors look to move out of the safer USD into riskier, higher-yielding assets. We forecast a decline in USDCAD in H2 to 1.30 but the potential for a modest downside overshoot may be rising.