By Ketki Saxena
Investing.com – The Canadian dollar weakened against its US counterpart today, with the greenback rallying as US economic data and hawkish speak from Federal Reserve officials raised bets for further Fed interest rate hikes. The risk-sensitive Canadian dollar meanwhile was pressured by downbeat investor sentiment, while weak crude prices also weighed on Canada’s commodity currency.
The greenback rallied against a basket of currencies today as hotter than expected US producer price index raised concerns of underlying inflationary pressures.
Monthly producer prices accelerated in January, with the PPI rising 0.7% compared with economist expectations for a 0.4% increase (6.0% year over year vs. 5.4% expected). Meanwhile US jobless claims came in at 194,000, compared to expectations for 200,000 claims, indicating resilience in the labour market.
Both pieces of data raised the case for a more Hawkish Fed, as did commentary from Fed officials. Federal Reserve Bank of Cleveland President Loretta Mester and St. Louis Fed President James Bullard both noted that the Fed needs to keep raising interest rates towards a restrictive level in order to bring inflation back to its 2% target.
The Canadian dollar, sensitive to risk and closely linked to equities, was pressured by the expectations for Fed hawkishness, particularly as the Bank of Canada may have reached its terminal rate - although the Canadian central bank has reiterated it is willing to raise rates further should the data indicate such a move would be necessary/
Analysts at Danske Bank note, “Bank of Canada has clearly expressed that they now believe to have reached the peak in policy rates amid signs of a slowing labour market and concerns as to the level of private debt in the economy. Our call is in line with these signals, which in turn means that relative rates look set to be a positive for the cross in the months ahead.”
“We still have a higher USD/CAD as our base case and although we expect energy prices to remain elevated we believe the broad USD effect is set to dominate – especially on a 3-6M horizon.”
The analysts forecast for the USD/CAD pair is at 1.35 in three-months and at 1.37 in six-months.