By Ketki Saxena
Investing.com – The Canadian dollar started the new year on a defensive note, weakening against its US counterpart today as the US dollar rallied, continuing the dominance it displayed for much of 2023. Heading into a new year, worries of a global slowdown - and the prospect of still higher interest rates - continue to dominate, leading investors to buy up the safe-haven greenback.
The Canadian dollar meanwhile was pressured by the uncertain risk sentiment, and crude prices that fell on recession worries and data indicating decreased demand in China despite the repeal of Covid-19 lockdown measures.
The USD/CAD pair rally began at the opening of the Asian session, with risk-sentiment and crude prices pressured by negative economic indicators from China. Indicating expectations of poor domestic demand, the Chinese government raised export quotas for refined oil products in the first batch for 2023.
Additionally, China’s factory activity shrank as surging COVID-19 cases continued to weigh on economic output even after the wide scale rescinding of lockdown measures - a further headwind for the risk-sensitive, crude linked loonie.
Further weighing on risk-sentiment, the IMF predicts a simultaneous slowdown in the United States, Europe and China this year.
The safe-haven US dollar received a further boost from expectations for the Fed’s december meeting minutes scheduled for release tomorrow, with traders expecting the US central bank to stay hawkish.
The U.S. central bank raised interest rates by 50 basis points last month after delivering four consecutive 75-basis point hikes, but has said it may need to keep interest rates higher for longer to tame inflation.
The Bank of Canada meanwhile, is expected to pause its rate hike cycle sooner and at a far lower rate than the Fed, posing a further headwind for loonie.
On a technical level, analysts at FX live note “Technically, last week’s test of 1.3500 was a lower-low, so a lower-high hold can keep the door open for bearish scenarios in USD/CAD, with an initial support at 1.3578 after which the 1.3500 psychological level comes back into the picture.”