Loonie Gives Back Day's Gains vs. Greenback, Robust US Data Drives Pair Dynamics

By Ketki Saxena 

Investing.com – The Canadian dollar strengthened against in more than two months agains its US counterpart today, before giving back most of the day's gains as the dollar rallied with a slew of robust US economic data that had investors adjusting rate hike bets ahead of the US Federal Reserve’s interest rate hike due next week. 

Futures have nearly fully priced in 25 basis points hike next Wednesday and see the Fed's overnight rate at 4.45% by next December, although Fed officialls continue to project a terminal rate above 5%. 

Today’s raft of US economic releases continue to show resilience in the economy, boosting treasury yields and  bets that the Fed will stay hawkish next week, although trading on the US dollar remained volatile as inflationary pressures also eased. 

The US GDP reading showed economy grew at a 2.9% annual rate during the fourth quarter, above the 2.6% of market consensus. Initial Jobless Claims dropped to the lowest level since April 2022, while durable Goods Orders rebounded 5.6% in December compared to  market expectations for a 2.5% increase. 

The Canadian dollar meanwhile managed to hold its own against the US dollar after yesterday’s immediate reaction to the Bank of Canada’s announcement of a muted 25 bps hike and pause in its monetary policy tightening for this cycle.

Analysts at FX Live note, “That's in part because the market sees the shift at the BOC as a sign of things to come in the rest of the world. In turn, that will boost global growth and boomerang back into demand for Canadian commodity exports.” 

The Canadian dollar was also supported by gains in crude on continued optimism about China’s reopening (though messaging from the world’s top importer of crude remains muted during holiday week). Crude is also being supported by reports that the ban on Russian energy exports ban to the EU could be converted to a price cap.

Looking ahead, analysts at Commerzbank (ETR:CBKG) see limited potential for the loonie ahead, noting “The US data and market expectations on the US central bank clearly also constitute an important driver for USD/CAD though. We confirm our outlook and see limited potential for a CAD recovery medium-term.”

This is a view reinforced by analysts at TDs, who note, “For now, we think CAD is likely to lag on most crosses.”

“With disappointing earnings guidance, there may be room for risk to extend lower. That leaves USD/CAD at risk of a test into 1.3500/25 near-term, where we see a lot of technical significance.”

Up next, all eyes will be on the US Fed, with an announcement expected on the 1st of February.