By Ketki Saxena
Investing.com – The Canadian dollar continued to strengthen against its US counterpart today, buoyed by rising-risk on sentiment ahead of earnings week, crude prices, and expectations for a rate-hike from the Bank of Canada next week. The US dollar meanwhile weakened against a basket of currencies as dovish commentary from Federal Reserve policymakers led to investors paring back bets on the Fed’s next move in February.
The US dollar weakened against a basket of major currencies today following weak economic data. US Existing Home Sales for December declined 1.5% in November, down for the eleventh consecutive month, showing continued weakness in the housing market and riaisng hopes of a less aggressive Fed going forward.
Dovish Fed speak further had investors raisng bets for a downshift, following Philadelphia Fed President Patrick Harker’s commentary that “Hikes of 25 basis points will be appropriate going forward.”
The Canadian dollar strengthened against its U.S. counterpart on Friday, recouping losses from earlier in the week, as equity markets rallied, crude prices continued to gain on roaring China optimism, and weak economic data.
Canada’s docket reported retail sales, which dropped by -0.1% MoM in November, following on a -5% decline in November.
On a technical level, analysts at FX Street note, “Aside from economic data releases, the USD/CAD was also underpinned by an upbeat market sentiment. The pair dropped beneath the 20-day Exponential Moving Average (EMA) at 1.3470 and also tumbled below the 100-day EMA at 1.3426. Hence, the USD/CAD bias is shifting from neutral-biased to neutral-bearish”
On a fundamental level, Shaun Osborne, chief currency strategist at Scotiabank (TSX:BNS) notes "To a large extent the squeeze higher we had in U.S. equity markets today explains the strength in the Canadian dollar that we've seen”.
"There is still a quite strong short-term correlation between the CAD and U.S. equities."
The commodity linked loonie also got a further boost from crude prices,
Up next, all eyes will be on the Bank of Canada’s next policy announcement on Wednesday, January the 25. Expectations are for a 25 bps move , expected widely by economists to be the BoC’s last rate hike this tightening cycle.
However, the upside to the Canadian dollar from the BoC’s move is expected to be limited.
Analysts at TD (TSX:TD) note, ““While this is expected to be the last hike, the CAD may not receive much directional bias from this meeting as the curve may continue to be biased about looking at the other side of this interest rate cycle. That said, the CAD may be more sensitive to any dovish elements should the BOC emphasize elements from the BOS. We see a differentiated dynamic playing out on the crosses given risk correlations.”