By Ketki Saxena
Investing.com - The Canadian dollar weakened against its U.S. counterpart today, as a hawkish stance and pessimistic forecast from the Fed boosted risk aversion, supporting the safe-haven greenback.
The Canadian dollar along with other risk assets was pressured by the sharp rise in risk-aversion, as well as domestic data that showed weakness in the housing market. The loonie also suffered from a slide in crude prices on worsening worries of demand destruction following tighter policy from global central banks.
Risk aversion returned with a vengeance today as worries of tighter monetary policy globally weighed on investor sentiment, and expectations for the Fed to hold rates higher for longer sharply boosted demand for the dollar. Yesterday, the US Fed hiked rates by 50 basis points and revised its September projection, including an upward revision of the Federal Funds rate.
Policymakers expect the FFR to sit at around 5.1% through 2023, whereas investors had been hoping for indications of a pivot or pause on interest rates next year. The Bank of England and the European Central Bank also raised interest rates earlier today as they seek to combat inflation, further fuelling worries of a global downturn and supporting the safe-haven greenback.
The Canadian dollar meanwhile was pressured by dampened investor sentiment, as well as data that showed a further weakening in Canadian housing demand as the Bank of Canada’s interest rates cools the economy. The negative domestic economic data raises hopes that the Canadian central bank has reached rather than nearing the end of its aggressive policy tightening cycle.
The loonie also suffered from a slide in crude prices, as hawkish central banks globally worsened worries of demand destruction for the commodity. Oil prices were also pressured by the restart of part of the Keystone pipeline, a major pipeline transporting Western Canadian crude to the US midwest and Gulf Coast.
The part of the pipeline that was unaffected by last week's oil leak in Kansas has returned to operations, while the portion of the pipeline affected by the spill remains shut down.
On a technical level, analysts at FX Street note “Although the USD/CAD uptrend remains intact, it should be said that the ongoing rally could halt at around the 1.3689/1.3700 area. However, the Relative Strength Index (RSI) and the Rate of Change (RoC) suggest that buyers are gathering momentum, but a decisive breach above 1.3700 Is needed, so the USD/CAD might test higher prices.”
“Therefore, the USD/CAD key resistance levels are 1.3700, followed by November’s 3 high of 1.3808, ahead of the YTD high of 1.3977”