The Bank of Canada鈥檚 largest interest rate hike in 24 years caused the loonie to drop to a 20-month low as investors feared the U.S. Federal Reserve would mirror the full percentage point hike in two weeks.
The Canadian dollar dropped to a low of 75.62 cents US in early trading, its lowest level since Nov. 4, 2020 and nearly one-a-half-cent drop from 77.07 cents US on Wednesday.
Erik Bregar, director FX and precious metals risk management at Silver Gold Bull Inc., said the odds of the Fed increasing rates by one percentage point increased to 90 per cent after the Bank of Canada added an extra 25 basis points to the forecasts of a three-quarters of a percentage point increase.
鈥淎nd so that just kind of put a flame under the (U.S.) dollar broadly, knocked commodities lower, knocked the S&P lower and I think it frankly just caught everybody off-guard,鈥� he said in an interview.
Bregar said the loonie is at a 鈥渃ritical juncture鈥� 鈥� it can rally from the lows or fall even further because there鈥檚 not a lot technically to stop a bigger decline.
鈥淲e鈥檙e kind of dangling off a little cliff here. The market kind of needs to show us can it recover? If not then we鈥檙e probably going a lot lower.鈥�
The currency partially recovered Thursday to 76.12 cents US in afternoon trading after Fed governor Christopher Waller said the market was 鈥渒ind of getting ahead of itself.鈥�
He said he鈥檚 waiting for U.S. housing and retail sales data before deciding whether to support an increase above the expected three-quarters of a percentage point.
The U.S. dollar, which has been flying high amid the threat of a recession, gained further ground against most major currencies primarily due to short-term yields rising following a report Wednesday that the annual inflation rate in the U.S. hit 9.1 per cent in June, the highest in more than 40 years.
鈥淭he U.S. dollar remains so strong that no currency defies its strength,鈥� said Ipek Ozkardeskaya of Swissquote Bank SA.
Scotiabank chief currency strategist Shaun Osborne said 鈥渞isk aversion鈥� was dragging the Canadian dollar lower after the Bank of Canada鈥檚 bold move.
鈥淲eaker crude may be weighing on Canadian dollar sentiment at the margin but that would be harsh, given that stronger crude has barely helped the Canadian dollar in the past few months,鈥� he wrote in a report.
Concerns about the loonie鈥檚 direction might be focused on the central bank鈥檚 soft-landing outlook as it jacks up rates, but that doesn鈥檛 explain Thursday鈥檚 big move since there are similar worries about the U.S. Federal Reserve鈥檚 soft-landing scenario, he said.
The Canadian dollar鈥檚 early weakness was accompanied by the August crude oil contract falling to a low of US$90.56, its lowest level since February. It subsequently increased to US$95.78.
