By Ketki Saxena
Investing.com – The Canadian dollar continued to strengthen against its US counterpart today, both ahead of and following the US Federal Reserve’s decision to hike rates by an expected 25 basis points.
While the rate hike was as expected, and “ongoing increases” on the dock - the plural implying rate hikes possibly in May as well as March , Jermoe Powell’s comments at a press conference revealed what investors digested as the much hoped for dovish tilt.
The major indicator was inflation, with Powell noting that "We can now say for the first time that the disinflationary process has started".
While the central bank governor reiterated the risks of under tightening vs. over tightening policy, Powell did acknowledge that rate cuts could begin taking place this year“if inflation comes down much faster.”
Following the commentary, the greenback saw its selloff gain pace, and investors move money into riskier asset classes, including equities, crude oil, and other commodities, boosting the risk-sensitive loonie.
On a technical level, analysts at FX Street note, “We have already seen the bears chip away at the 1.3305 structure, and this is technically already broken, exposing the 1.3220s and then the 1.3150s. On the upside, we have 1.3380s that guard the 1.3450/80s.”
“The move following the Fed is digging in at the structure in possible preparation for a downside extension.”
On a fundamental level, analysts at Society Generale, the Canadian dollar is set to be stuck in a rut in the medium term drive by Bank of Canada vs. Fed dynamics, and yield differentials.
The analysts note, “Bank of Canada monetary policy is tracking Fed decisions, which also limits the directionality of rates differentials, preventing USD/CAD from trending for now. As a result, Canadian and US inflation are now extremely close and on the same decelerating path.”
However, in the longer term this year, they expect the Canadian dollar to rebound as central banks taper off on monetary policy tightening in 2023, and as commodities rebound. They note, “This bias remains bearish USD/CAD, as the global soft landing supports risk assets, which is a positive CAD factor.”