Rate convergence restrains Canadian dollar to U.S. counterpart

Rate convergence restrains Canadian dollar to U.S. counterpart

The Canadian Dollar Weakens Against the Strong US Counterpart

In current market conditions, the Canadian dollar is facing a significant challenge as it weakens against the stronger US dollar. However, this decline is limited as investors believe that the Bank of Canada and the Federal Reserve will follow similar interest rate paths.

The US dollar has experienced an increase in value compared to other major currencies due to positive economic data and a dovish European Central Bank. This unexpected turn of events has forced investors to reconsider their assumptions about the Fed pausing its interest rate hikes. As a result, the Canadian dollar finds itself unable to escape the shadow of its US counterpart.

Shaun Osborne, Chief Currency Strategist at Scotiabank, suggests that the Fed and the Bank of Canada are perceived to be on similar paths when it comes to interest rates. This perception is unlikely to change unless there is a significant shift in market thinking. Consequently, the Canadian dollar is expected to remain relatively rangebound until such a shift occurs.

Current expectations for the Bank of Canada indicate interest rates could reach about 5.25% in the coming months. This is only slightly lower than the 5.42% terminal rate priced in for the Federal Reserve. To gain further insight into potential Bank of Canada rate hikes, investors are looking to the upcoming Canadian GDP data for May, set to be released on Friday.

As of now, the Canadian dollar is trading at 1.3227 against the US dollar, marking a 0.2% decline. In comparison to other G10 currencies, except for the yen, the Canadian dollar has experienced bigger declines. However, some experts argue that the Canadian dollar is undervalued. Recent convergence between Canadian and US yields, improved risk appetite, and higher commodity prices, such as oil, one of Canada’s major exports, suggest that the Canadian dollar should be stronger.

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Oil prices settled 1.7% higher at $80.99 a barrel, which is the highest since April. This increase in oil prices has contributed to the improvement in the risk appetite of investors. Additionally, the Canadian 5-year yield reached its highest level since December 2007 at 4.030% before slightly dipping to 4.019%, showcasing an increase of 13.9 basis points in a single day.

In conclusion, the Canadian dollar is currently facing challenges as it weakens against the stronger US dollar. However, investors believe that the Bank of Canada and the Federal Reserve will follow similar interest rate paths, which limits the Canadian dollar’s decline. Despite this, some experts argue that the Canadian dollar is undervalued, pointing to recent convergences in yields, improved risk appetite, and higher commodity prices. The upcoming Canadian GDP data for May will provide further insight into potential rate hikes by the Bank of Canada.

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