USD/CAD climbs to 1.3440 on risk aversion, despite Fed dovish commentary

• The Canadian dollar extended its losses amid a risk-off mood.
• New York Fed President Williams said the Fed could hike in 2024.
• Canada printed a deficit on its current account, a headwind for the Loonie.

The Loonie (CAD) extended its losses to two straight days, though it trimmed some of its losses after the USD/CAD hit a daily high of 1.3473 but retreated toward the current spot price. Factors like China’s riot due to Covid-19 zero-tolerance policies and Federal Reserve (Fed) officials laying the ground for slower borrowing cost increases capped the USD/CAD rally. At the time of writing, the USD/CAD is trading at 1.3442, above its opening price.

Fed’s Williams shifted dovish, eyeing the first-rate cut

Risk aversion is the name of the game on Monday. Protests in China related to Covid-19 lockdowns and mass testing, and fears that if it escalates might derail the global economy, weighed on investors’ mood. Federal Reserve officials crossing newswires, led by the New York Fed President John Williams, said that the Fed could reduce rates in 2024, a dovish statement that caused a fall in the USD/CAD from 1.3452 to 1.3420s.

Earlier, Williams said he expects inflation to fall to 5.0%-5.5% by the end of 2022 and 3.0%-3.5% by late 2023 and noted that the baseline forecast does not predict a recession for the US. In the meantime, the St. Louis Fed President James Bullard said the Fed needs to keep increasing rates until 2023. He commented that rates must reach the low end of the 5%-7% rate range, adding that a recession is not inevitable.

Traders should remember that the Federal Reserve Open Market Committee (FOMC) minutes for the last meeting indicated that “A substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate,” cementing the Fed’s moderating interest rates.

Of late, the Cleveland Federal Reserve President Loretta Mester stated that she does not believe that the Fed is close to a pause on tightening, reiterating its hawkish stance. Traders should know that Mester expects the FFR to end at around 5%.

Canada posted a current account deficit of C$11.1-billion ($8.3-billion) in the third quarter after surpluses in the first two quarters of 2022, data from Statistics Canada showed.

USD/CAD Key Technical Levels