USD/CAD: Loonie Weakens on Hawkish Fed Speak; Pair Expected at 1.30 by Year End

© Reuters.

By Ketki Saxena

Investing.com – The Canadian dollar weakened against its US counterpart today, as investors digested hawkish Fedspeak that weighed on risk sentiment and supported the safe haven greenback.

Following commentary by US Federal Reserve Jerome Powell yesterday that reiterated much of the messaging from the Fed’s Feb move, markets got further impetus through comments from Federal Reserve Bank of Minneapolis President Neel Kashkari.

The notoriously hawkish Kashkari noted that interest rates will need to rise higher cool labour markets and to stifle wage growth as a precursor of the dreaded wage-price inflation spiral.

Kashkari noted “There’s not yet much evidence, in my judgment, that the rate hikes that we’ve done so far are having much affect on the labor market. We need to bring the labor market into balance so that tells me we need to do more.”

Risk sentiment meanwhile was the main driver of the pair’s action today as the US dollar remained steady, pressuring the Canadian dollar which remains closely linked to equity markets.

Canada’s commodity currency meanwhile gained some support from crude prices, which continued a third day of gains despite US inventory builds and Fed hawkishness, remaining buoyed by the Chinese reopening, embargo driven supply concerns regarding Russian crude, and oil infrastructure instability in Turkey following earthquakes.

Looking ahead, a Reuters poll of analysts indicates that the Canadian dollar is set to remain little changed in the next three months at 1.34 per U.S. dollar, or 74.63 U.S. cents. On a positive note, the Canadian dollar is expected to strengthen to 1.30 in a year, a gain of just over 3%, but unchanged from the January poll forecast.

Jay Zhao-Murray, market analyst at Monex Canada Inc noted, "Central banks are starting to pause, and I think that is going to create a bit more of a supportive environment for cyclical currencies like the loonie, especially in the second half of the year," Zhao-Murray said.

The loonie is also expected to be supported by rebounding crude demand in China, the world’s largest importer on the commodity.

BoFA analysts are amongst those even more bullish on the Canadian dollar, forecasting a Q1 forecast of 1.32 and a year end forecast of 1.25 for the USD/CAD pair, despite a rate hike pause from the Bank of Canada.

They note that “The Canadian Dollar will benefit from supportive equity factor, energy factor, and seasonality in the coming months.”

On a technical level, analysts at FX Live note that “The prevalent risk-off mood benefits the US Dollar's relative safe-haven status and assists the USD/CAD pair to attract some buyers near the 1.3360 region.”

“From a technical perspective, any subsequent move up might continue to confront stiff resistance near the top end of over a two-month-old descending channel. The said hurdle is pegged near the 1.3455 area and is followed by the last week's swing high, around the 1.3475 zone, which should now act as a pivotal point.”

“A sustained strength beyond will be seen as a fresh trigger for bullish traders and set the stage for an extension of the recent recovery move from the lowest level since November 16. Some follow-through buying beyond the 50-day SMA will reaffirm the positive bias and push the USD/CAD pair beyond the 1.3500 psychological mark.”