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Loonie Rallies as Risk Sentiment Returns to Markets; All Eyes Now on Fed

Forex Dec 08, 2022 16:20
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By Ketki Saxena 

Investing.com --The Canadian dollar strengthened against its US counterpart today, supported by a rebound in risk sentiment that pushed Wall Street into the green after four days of losses. 

The Canadian dollar also received support intraday following a sharp but short rally in crude prices, while the greenback weakened against major currencies, consolidating after a week driven by fears of Fed aggressiveness. Meanwhile, the pair was little changed following a speech by Bank of Canada deputy governor Sharon Kozicki, which reiterated much of the rhetoric in yesterday’s statement following the BoC’s monetary policy announcement.  

The loonie rallied against the safe-haven greenback today as risk-on sentiment returned to markets, following yesterday’s official announcement of easing Covid-19 lockdowns in China. The announcement raised hopes that the world’s second-largest economy will pick up its pace of growth, and help normalize global supply chains driving inflation. 

Investor sentiment also received support from US weekly jobless claims, which were in line with expectations and indicated a weakening labour market, somewhat tempering fears of Fed aggressiveness after resolutely positive economic data in the last few days. 

However, US treasury yields continue to march ahead, indicating a tailwind for the greenback as expectations for the Fed to remain aggressive remain high.

The Canadian dollar also received support intraday from a short-lived rally in crude prices following news of a shutdown of the Keystone pipeline, a major conduit carrying Western Canadian Select from the Canadian oil sands to the Gulf Coast. However, the outage is expected to be short lived, and despite the Chinese reopening and price caps on Russian crude, crude prices continued to slide on worries of demand destruction driven by the Fed’s rate hikes. 

The loonie meanwhile appeared to largely shrug off a speech by Bank of Canada deputy governor Sharon Kozicki. In line with yesterday’s monetary policy statement, Kozicki reiterated that a pause was likely on the table, but another rate hike was not yet off the cards as the BoC takes a data-driven approach to guiding its next move. 

Up next, all eyes will be on next week’s all-important US CPI report, as well as the Fed’s monetary policy announcement. 

On a technical level, FX Street notes that these economic drivers “Will play a key role in influencing the near-term USD price dynamics and provide a fresh directional impetus to the USD/CAD pair.” 

“This makes it prudent to wait for strong follow-through selling before confirming that the recent positive move witnessed over the past week or so has run out of steam. That said, bulls need to wait for a sustained move beyond the 1.3700 mark before positioning for additional gains.”

Loonie Rallies as Risk Sentiment Returns to Markets; All Eyes Now on Fed
 

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