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Loonie Gains as Crude Rallies; Greenback Beats Broad-Based Retreat

Published 2023-01-19, 04:43 p/m
© Reuters.
USD/CAD
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By Ketki Saxena 

Investing.com – The Canadian dollar strengthened  against its US counterpart today following a broad based retreat in the US dollar. Weak US economic data continued to raise hopes of a pause from the Federal Reserve, despite hawkish commentary from Fed policymakers. Despite uncertain risk sentiment that pressured equities, and weak domestic economic data that had investors pare back bets on the Bank of Canada’s move next week, the Canadian dollar was boosted by crude prices. 

Despite a slew of Fed policymakers - including Cleveland Fed president Loretta Mester said more hikes, St. Louis Fed president James Bullard, Federal Reserve Bank of Boston President Susan Collins, and Federal Reserve Governor Lael Brainard backed the “higher for longer” rates narrative, markets remained optimistic about a pivot from the Fed following yesterday’s exceptionally weak retail sales data and Producer Price Index that indicated easing inflation. 

Canadian economic data meanwhile capped further gains on the loonie, showing wholesale trade increased by 0.5%, compared to expectations for a 1.9% increase. The weak data raised concerns of a slowdown in the Canadian economy, leading investors to pare back bets on the Bank of Canada’s next move next week. 

Money markets now see a roughly 60% chance that it will further raise the policy rate by a quarter of a percentage point next Wednesday, down from 75% last week after CPI data showed that headline inflation eased but median and trim inflation - the BoC’s preferred metric of underlying price pressures - remained little changed and exceptionally sticky. 

The commodity linked loonie was boosted however by the rally in oil prices driven by growing hopes around rising Chinese demand, even as worries of a global economic downturn remain at the forefront, and the US continues to build large crude inventories. 

Chinese oil demand climbed by nearly 1 million barrels per day (bpd) from the previous month to 15.41 million bpd in November, the highest level since February, according to the latest export figures published by the Joint Organisations Data Initiative.

Crude prices - and the loonie - are also being supported by expectations of dwindling supply from Russia with another raft of sanctions expected. 

On a technical level, analysts at FX Street note that “USD/CAD bears are taking on a double bottom near 1.3450 support area”, eyeing a “61.8% Fibonacci retracement near 1.3415 should the double bottom (DB) be breached.” 

“The bullish accumulation schematic played out, with the price respecting the spring and a subsequent break of resistance near 1.3450 leading to a drive to mitigate the price imbalance, albeit not in its entirety.  At this juncture, it is a matter of wait-and-see, but the bias is bullish while above the old resistance”. 

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