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Loonie Weakens Against USD as Risk-Aversion Dominates, Fed Set to Outpace BoC

Forex Sep 27, 2022 13:33
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By Ketki Saxena 

Investing.com The Canadian dollar continued to weaken against its US counterpart risk-off sentiment remained the dominant theme of the day with rate hikes and resolutely hawkish Fed speak continued to weigh on markets, pressuring the risk-sensitive loonie and buoying demand for the same haven greenback. 

Despite starting the day on a soft note, the dollar rallied broadly in line with a reversal in markets' sentiment towards riskier assets, with North American equities paring back the morning’s gains. 

With risk-off sentiment in the ascendant as global central banks including the Fed remain committed to further rate hikes, the dollar is expected to maintain its strength.  Paul Mackel, global head of FX research at HSBC writes,  "The Fed is firmly hawkish and global growth is weakening, and you put those forces together alongside higher elements of risk aversion - it's all pointing to a strong dollar if not a strengthening dollar."

While the Bank of Canada also remains resolutely hawkish, the Canadian central bank will likely be unable to hike rates as high or for as long as the Fed, given the relatively greater sensitivity of the Canadian economy to rising rates - in part due to its heavily weighted property market. A pullback in the price of oil, one of Canada's major exports, has been an additional headwind for the loonie,

Investors expect the Fed's policy rate to reach a terminal rate of about 4.60% by the end of the first half of 2023, compared to around 4.10% for the BoC's policy rate. 

Looking ahead, Danske Bank remains bullish on the USD/CAD pair. The Bank notes, we continue to pencil in more topside driven by both broad-based USD strength, shaky global asset markets, tighter global financial conditions and a Bank of Canada delivering less tightening than the Fed.”

“A much improved global growth outlook and/or more dovish central banks mark the biggest downside risk factor to our forecast. On the other hand, a sharp global recession could send USD/CAD considerably higher than in our base case.”

A silver lining for loonie bulls: TD (TSX:TD) Economists “Expect the US dollar to lose some of its formidable steam around the turn of the year as the end of Fed hikes comes into view. And, we thus expect the Canadian dollar to gradually recover in 2023, albeit ending next year lower than we previously expected at around 1.30.”

Loonie Weakens Against USD as Risk-Aversion Dominates, Fed Set to Outpace BoC
 

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