By Ketki Saxena --
Investing.com -- The Canadian dollar was little changed against its U.S. counterpart on Monday, staying close to an earlier three-week high on increased oil prices and a recent decrease in the difference between U.S. and Canadian bond yields.
"The strength in the (Canadian) dollar is really driven to a large extent by narrowing interest rate spreads," stated Benjamin Reitzes, Canadian Rates & Macro Strategist at BMO (TSX:BMO) Capital Markets. "The rebound in oil prices hasn't hurt either but the rate story is probably the bigger one."
Canadian government bond yields experienced an increase across the curve, tracking U.S Treasuries and reducing the gap between Canada's 2-year yield and its U.S equivalent as investors bet that the Federal Reserve is approaching a halt in its interest rate hiking campaign.
Oil, which constitutes one of Canada's major exports, recovered some recent losses for two consecutive days as an allaying of regional banking fears and Friday’s stronger-than-expected US jobs report helped recession fears fade.
However, speculators have intensified their bearish bets on the Canadian dollar according to data released by the U.S Commodity Futures Trading Commission last Friday: As of May 2nd net short positions had risen from the previous week’s 43,791 to 50,096 contracts.
On a technical level for the pair, analysts at Daily FX note, "With bears back in control of the market, traders should carefully watch technical support near the psychological 1.3300 mark, which also aligns approximately with the 2023 lows. If this floor caves in, USD/CAD’s broader outlook will turn quite negative, opening the door for a slide toward 1.3220.
On the flip side, if the exchange rate perks up and begins to rebound, the 200-day moving average should act as resistance to prevent a significant bullish turnaround. However, if this barrier is taken out, bulls could launch an assault on the 1.3500 handle."