“work paused” to recover from recession
it started in June.
“US dollar (
Overall resilience and bullish long-term trend dynamics suggest the CAD (Canadian dollar) still has some work to do if it is to improve significantly in the near term,” Sean Osborne, chief currency strategist at Scotiabank Global FX Strategy, said Monday.
The Canadian dollar began its decline in June, falling 3.3 percent against its US counterpart to 71.3 US cents, its lowest level since April.
The decline comes after a rally earlier in the year that saw it rise just over seven percent from a multi-year low of 68.8 US cents to 73.7 US cents.
It looks like the Canadian dollar could potentially continue to rise as
on the US dollar, which experienced a sharp sell-off against the basket
currencies of developed countries
including loonies.
Analysts called the U.S. dollar selloff a “de-dollarization trade” and attributed it to nervous investors seeking to hedge their risks amid concerns about the impact of tariffs on the U.S. economy and the growing federal budget deficit by moving funds into other reserve currencies such as the Japanese yen, Swiss francs and euros.
Some investors now believe the scale of the de-dollarization deal is exaggerated as money is being returned to the US dollar.
Arup Chatterjee, managing director and macro strategist at Wells Fargo & Co., said in a note that the de-dollarization trend has been “overestimated” as central banks' U.S. dollar holdings appear stable.
Chatterjee said the US dollar strengthened amid weaker global economic data and shifting trade tensions between the US and China.
“In a world of heightened political uncertainty, long-term investors may be more tolerant of U.S. political risks given the U.S. dollar's unrivaled liquidity and depth of capital markets.” said Chatterjee. “While these dynamics could change if U.S. political risks intensify, we see limited short-term justification for meaningful de-dollarization.”
As for the Canadian dollar, Scotiabank's Osborne said several technical steps need to be taken “to suggest a recovery is developing.”
For example, the Canadian dollar needs to “regain” its 200-day moving average of 71.6 US cents, coupled with the US dollar falling to $1.39 (CAD) – its September high and 40-day moving average – “to indicate better chances for a more sustained bounce in the Canadian dollar.”
However, this may not be an easy task given the upcoming
interest rate announcement on October 29.
Markets are now betting that the central bank will cut the policy rate again by 25 basis points after its previous cut in September, bringing it down to 2.25 percent.
“We believe implied contraction swap ratios—currently around 70 percent—could rise slightly, putting downward pressure on the Canadian dollar,” Carl Sciamotta, chief market strategist at Corpay Reaearch, said in a note.
The US Federal Reserve will also announce a rate decision on the same day as the Bank of Canada, with markets pricing the likelihood of a rate cut at almost 100 percent. This will leave the Fed's effective rate at four percent, still much higher than Canadian rates and continuing to make the US dollar a more attractive option for investors.
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