By Ketki Saxena
Investing.com – The Canadian dollar stayed flat against its US counterpart in a day of choppy trading, as an uptick in risk sentiment helped North American indices and the risk-sensitive Canadian dollar reverse the morning’s losses.
However, the outlook for CAD remains bearish as Friday’s US Non-Farm Payrolls blew past expectations, dramatically raising expectations for further rate hikes from the Federal Reserve.
Swap contracts that reflect expectations for rate hikes from the Federal Reserve now indicate over 80% odds of the US central bank raising its policy rate range to 5%-5.25% in early May.
The Bank of Canada meanwhile is expected to keep interest rates on hold this week and into the foreseeable future, as it stands on the sidelines to gauge the impact of rate-hikes on inflation and the economy so far.
The divergence of policy between the US and Canadian central banks contributes to the rising differential between US Treasury and Government of Canada bond yields, making the greenback a more attractive option than its Canadian counterpart.
An uncertain prospect for oil prices meanwhile also serve as a headwind for the commodity linked loonie, as crude investors contend with the prospect of a Fed-driven global slowdown and reduced demand for oil.
Analysts at Scotiabank (TSX:BNS) also note that CAD short positions have reached their highest combined level since 2008, leaving the Canadian currency exposed to a short squeeze.
“FTC data through last Tuesday (and released last Friday) showed that investors maintained an extremely large net short CAD (the largest since 2008 for combined positioning) despite the clear improvement in the CAD since early March when traders loaded up heavily on net CAD shorts. A short squeeze of some significance remains a risk.”.