By Ketki Saxena
Investing.com – The Canadian dollar weakened against its US counterpart today, as the greenback continued to rally on expectations of a more hawkish Fed than had initially been appreciated, following a raft of commentary from Fed policymaker this week, and US economic data that consistently surprised to the upside.
Data this week included monthly producer prices increasing by the most in seven months in January as the cost of energy products surged, an unexpected decline of Americans filing new claims for unemployment benefits, and retail sales that increased the most in nearly two years.
All indicators point to further Fed hawkishness than investors had previously priced in, and sent treasury yields marching higher, supporting the greenback.
Traders are now fully pricing in quarter-point increases at both of the Federal Reserve’s next two meetings, and a higher than previously expected Terminal rate of 5.3%.
Analysts at Goldman Sachs (NYSE:GS) now expect three more rate hikes from the Fed.
The Canadian dollar, which remains closely linked to equities, meanwhile was pressured by the broader risk sentiment driven by Fed fears, as well as a decline in crude prices. A strong dollar, robust US inventory builds, and further planned releases from the US Strategic Petroleum reserves are weighing on the commodity, dampening optimism around the China reopening.
On a technical level for the pair, analysts at FX Street note, “The subsequent positive momentum should allow bulls to surpass an intermediate barrier near the 1.3570 area and aim to reclaim the 1.3600 round-figure mark. The upward trajectory could get extended further towards retesting the YTD peak, around the 1.3680-1.3685 region touched in January.”
“On the flip side, any subsequent pullback below the 1.3475-1.3470 horizontal resistance breakpoint, coinciding with the 50-day SMA, could be seen as a buying opportunity and remain limited near the 1.3400 mark. The latter should act as a strong base for the USD/CAD pair, which if broken might negate the positive outlook.”
Looking ahead, analysts remain divided on further rate-hike expectations from the Bank of Canada. Despite last week’s red hot Canadian labour market report, analysts at Canadian banks remain unconvinced that the single data point could make the Canadian central bank pivot from its conditional pause.
However, some analysts are pricing in the likelihood of a further rate hike, and the impact on the Canadian dollar, noting that even if the Bank of Canada does hike rates again, the impact to the loonie will remain limited.
Analysts at Commerzbank (ETR:CBKG) note, “If future data publications were to point towards further monetary policy tightening being required by the BoC imminently, CAD might benefit moderately. In view of the US central bank’s hawkish approach, we consider the appreciation potential of the Loonie against the greenback to be limited though.”
Analysts widely expect the Loonie to trade range bound against in the dollar in the medium term, before appreciating later in the year as central banks wind down their monetary policy tightening, and as demand for commodities rebounds.