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Loonie Weakens as Crude Nears 1-Year Low; Fed Bets Drive Risk-Aversion, Boost USD

Forex Dec 06, 2022 15:08
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By Ketki Saxena 

Investing.com -- The Canadian dollar continued to weaken against its US counterpart today following a 7% drop in crude, and as rising fears, the Federal Reserve will remain hawkish stoked risk sentiment, boosting treasury yields and the greenback

Stronger than expected US non-farm payrolls last Friday, and robust U.S. services industry data yesterday once again reignited worries the Federal Reserve still stay hawkish. Following a dovish speech from Fed Chair Jerome Powell last week, investors are now once again betting the Fed will still with aggressive rate hikes as the US economy remains well able to weather the shock of higher interest rates and inflationary pressures stay high. 

In addition to risk-aversion that also made itself felt in equities, the Canadian dollar was further pressured by a slide in crude prices, which neared a one-year low. Despite bullish indicators from the China reopening, EU price caps on Russian crude, and OPEC+ output, crude is being pressured by worries the Fed will push the US and global economy into a recession, destroying global demand for the commodity. 

While expectations rise for the Fed to remain aggressive, the Bank of Canada meanwhile has substantially slowed the magnitude of its rate hikes and is nearing its terminal rate, posing a further tailwind to the loonie. 

Money markets are betting on a downsized 25 bp increase at the BoC’s next policy announcement tomorrow, which would take the rate to 4.00%. However, economists have not ruled out the possibility of a larger 50 bp move tomorrow. 

Analysts at TD (TSX:TD) securities note  “The BOC is unlikely to offer much to move the needle for CAD. CAD underperformance on crosses has occurred quickly and looks tactically stretched. A case for a reversal can be made, but we will look to fade that strategically given idiosyncratic drags”. 

On a technical level, FX Live notes, “Today the low in the Asian session based at a swing level at 1.3569… will now be a close risk/bias defining level. Stay above is more bullish in the short term. Move below and we could see some rotation back to the downside.”

“Buyers are in control but need to extend above the highs to keep the ball rolling. Conversely, risk focus sellers could lean against the high hoping for a rotation back to the downside and retest of the 1.3569 level over time.”

Loonie Weakens as Crude Nears 1-Year Low; Fed Bets Drive Risk-Aversion, Boost USD
 

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