Title: Canadian Dollar Hits Six-Month Low as Technical Support Breaks, Market Focus Shifts to Upcoming CPI Data
By Reuters (originally reported by Fergal Smith)
Rewritten and Expanded by [Your Name or Organization]
The Canadian dollar (CAD) has reached a six-month low against the U.S. dollar, under pressure from falling oil prices, strong U.S. economic data, and technical signals that point to continued weakness. Investors are now closely watching upcoming Canadian consumer price index (CPI) data, which could further influence rate expectations and steer the direction for the loonie and Canadian bonds.
This article explores the various factors impacting the Canadian dollar, outlining key market dynamics, central bank expectations, and technical levels that may determine how the currency performs over the next few weeks.
Overview of the Recent Decline
– On Monday, the Canadian dollar fell to 1.3745 per U.S. dollar, the lowest intraday level since mid-November 2023.
– The pair later settled at 1.3730, marking a 0.3% loss for the Canadian dollar on the day.
– Looking over the past five sessions, the loonie has weakened in four, reflecting broader bearish sentiment.
Currency traders and analysts noted that the CAD’s decline occurred after it breached a key technical threshold at 1.3650, signaling to many that further downside could follow.
Technical Analysis: Breakdown of Key Support
– According to Kevin Flanagan, Head of Fixed Income Strategy at WisdomTree, a breach of major technical levels often triggers stop-loss orders and escalates momentum trading.
– The 1.3650 level was viewed as a significant support zone; once it was broken, traders saw it as a cue to push the Canadian dollar even lower.
– Market sentiment shifted markedly negative, especially given the loonie’s correlation to crude oil and risk appetite.
The importance of these technical levels should not be underestimated. Once breached, a change in psychological sentiment can send even fundamentally supported currencies downward.
Role of U.S. Economic Data and Dollar Strength
– The U.S. dollar has benefited from strong economic figures, with recent data pointing to resilient inflation, robust job growth, and continued consumer demand.
– The U.S. Federal Reserve has signaled that it may keep interest rates higher for longer as it attempts to bring inflation down to its 2 percent target.
– The U.S. CPI report released last week came stronger than expected, driving yields on U.S. Treasuries higher and supporting the greenback.
This macroeconomic resilience contrasts with some recent softness in Canadian data, leading investors to favor the U.S. dollar over the Canadian counterpart.
Interest Rate Differentials and Expectations
One of the biggest drivers behind FX markets is the difference in interest rates and expectations for central bank policy changes. In this aspect, the Canadian dollar is facing headwinds.
– The Bank of Canada (BoC) has adopted a more dovish tone in recent months, suggesting it may begin easing interest rates sooner than the Fed.
– According to swaps markets, traders are pricing in a 70 percent chance of a rate cut by the BoC at its June 5 policy meeting.
– In contrast, the Federal Reserve is not expected to deliver its first rate cut until September 2024 or later.
These diverging expectations have widened the yield spread between U.S. and Canadian government bonds, making the loonie comparatively less attractive to investors.
Oil Prices and Correlation with CAD
The Canadian dollar is often considered a “petro-currency” due to the country’s status as a major crude oil exporter. A sharp fall in oil prices has added pressure on the CAD.
– U.S. crude oil futures dropped 0.4 percent to settle at $81.16 per barrel on Monday.
– Weak global demand forecasts and higher-than-anticipated crude inventories in the U.S. have anchored oil prices.
– Canada’s economy is heavily tied to resource exports,
Read more on USD/CAD trading.