By Ketki Saxena
Investing.com – After six straight days of gains, the Canadian dollar weakened against its US counterpart today as risk-aversion returned to markets, pressuring equities, crude oil, and the risk-sensitive Canadian dollar.
Crude prices closed mixed in a day of choppy trading, as investors weighed production cuts from OPEC+ vs weak US economic and Chinese data that stoked fears of a recession and reduced demand.
The move higher in USD/CAD was more due to weakness in the loonie than USD strength, as the greenback sank to a two month low as weak economic data reinforced bets that the Federal Reserve will be forced to pause rate hikes soon.
The US Dollar Indexsank to a two-month low against a basked of currencies, as another round of weak economic data even as other central banks are seen still raising interest rates to overcome persistently high inflation.
Data showing U.S. job openings in February dropping to the lowest in nearly two years, while factory orders declined for a second consecutive month.
Rate futures markets are now pricing in a roughly even chance of a 25-bp rate hike vs a pause in May, with odds only slightly tilted toward a pause. Yesterday, the probability of a 25-bp hike next month was over 65%.
While weakening US economic data has supported bets of a pause from the Fed, economic data in Canada has come in consistently stronger than expected, serving as a tailwind for the loonie. Friday’s GDP numbers, tracking well above Bank of Canada estimates, has repriced expectations from the Bank of Canada and reduced the chances the BoC will keep rates on hold.
Analysts at Commerzbank (ETR:CBKG) note, “In our view, imminent rate cuts are not a fait accompli yet, the BoC will probably want to see further hard facts first. As a result, the market may be forced to delay its rate cut expectations which could support CAD.”
“On the other hand, the BoC’s rate decision next week is approaching and the market is likely to act increasingly carefully in the run-up.”