The Bank of Canada’s biggest interest rate hike in 24 years sent the Canadian dollar tumbling to a 20-month low as investors feared the US Federal Reserve would mirror the full percentage point rise in two weeks.
The Canadian dollar fell to a low of 75.62 US cents in early trading, its lowest level since November 4, 2020 and down almost half a penny from 77.07 US cents on Wednesday.
Erik Bregar, director of FX and precious metals risk management at Silver Gold Bull Inc., said the odds of the Fed raising rates by one percentage point increased to 90 percent after the Bank of Canada added 25 points. additional basics to forecasts of a three-quarter percentage point increase.
“And that just put a flame under the (US) dollar in general, it brought down commodities, it brought down the S&P and, quite frankly, I think it caught everybody off guard,” he said in an interview.
Bregar said the Canadian dollar is at a “critical juncture” — it may rebound from lows or fall further because technically there isn’t much to stop a further decline.
“We’re kind of hanging off a little cliff here. The market needs to show us if it can recover. If not, we will probably go much lower.”
The currency partially recovered on Thursday to 76.29 US cents in afternoon trading after Fed Governor Christopher Waller said the market was “getting ahead of itself”.
He said he is waiting for US home and retail sales data before deciding whether to support a rise above the expected three-quarters of a percentage point.
The US dollar, which has been flying high amid the threat of a recession, gained more ground against most major currencies mainly due to rising short-term yields following a report on Wednesday that the interest rate annual inflation in the US reached 9.1 percent in June. the highest in more than 40 years.
“The US dollar remains so strong that no currency is challenging its strength,” said Ipek Ozkardeskaya of Swissquote Bank SA.
Scotiabank chief currency strategist Shaun Osborne said “risk aversion” was dragging the loonie lower after the Bank of Canada’s bold move.
“Weaker crude may be weighing on Canadian dollar sentiment at the sidelines, but that would be harsh given stronger crude has barely helped the Canadian dollar in recent months,” he wrote in a report.
Concerns about the direction of the loonie could center on the central bank’s soft landing outlook as it raises rates, but that doesn’t explain Thursday’s big move as there are similar concerns about the Fed’s soft landing scenario. US Federal, he said.
The Canadian dollar’s initial weakness was accompanied by the drop in the August crude oil contract to a low of $90.56, its lowest level since February. It later increased to US$96.72.
This report from The Canadian Press was first published on July 14, 2022