TORONTO –
The Bank of Canada’s biggest rate hike in 24 years sent the moon to a 20-month low as investors feared the U.S. Federal Reserve would reflect on a full percentage point increase in two weeks.
The Canadian dollar fell to a low of 75.62 US cents in early trade, its lowest level since Nov. 4, 2020, and down almost a cent and a half from 77.07 US cents on Wednesday.
Eric Bregar, director of FX and risk metals 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 an additional 25 basis points to forecasts for an increase of three-quarters of a percentage point.
“So it just put a fire under the (U.S.) dollar in general, brought down commodities, brought down the S&P, and I think frankly caught everybody off guard,” he said in an interview.
Bregaard said the moon is at a “critical juncture” — it could rise from the bottom or fall further because technically there isn’t much to stop a bigger decline.
“We’re kind of hanging on a little cliff here. The market needs to show us if it can recover? If not, then we’re probably going much lower.
The currency recovered partially on Thursday to 76.29 US cents in afternoon trade after Fed Governor Christopher Waller said the market was “getting ahead of itself”.
He said he was waiting for data on U.S. housing and retail sales before deciding whether to support an increase above the expected three-quarters of a percentage point.
The U.S. dollar, which had been flying high amid the threat of a recession, gained further ground against most major currencies mainly as short-term yields rose after a report on Wednesday that annual U.S. inflation rose to 9.1 percent in June, the highest in more for 40 years.
“The US dollar remains so strong that no currency can challenge its strength,” said Ipek Ozkardeskaya of Swissquote Bank SA.
Scotiabank chief currency strategist Sean Osborne said “risk aversion” dragged the Canadian dollar lower after the Bank of Canada’s bold move.
“Weaker crude could weigh on Canadian dollar sentiment, but that would be a stretch given that stronger crude has barely helped the Canadian dollar over the past few months,” he wrote in a report.
Concerns about the loonie’s direction may be centered on the prospect of a soft landing by the central bank as it raises rates, but that does not explain Thursday’s big move as there are similar concerns about a soft landing scenario for the US Federal Reserve, he said .
The Canadian dollar’s early weakness was accompanied by the August crude oil contract falling to a low of $90.56, its lowest level since February. It subsequently increased to US$96.72.
This report by The Canadian Press was first published on July 14, 2022
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