By Ketki Saxena
Investing.com -- The Canadian dollar rallied against its U.S. counterpart on Monday, largely attributed to the increasing optimism that a global economic downturn may be successfully evaded, providing support for risk-sensitive commodity currencies.
In the previous week's data from the US, the Core Personal Consumption Expenditures Price Index witnessed a decline , while there was also a slight dip observed in the Employment Cost Index (ECI). These reports collectively suggest that inflation is moving in an encouraging direction, raising hopes the US Federal Reserve will be able to achieve a soft landing.
The commodity-linked loonie was also supported by crude prices, at their highest point over three months due to expectations surrounding Saudi Arabia extending voluntary output cuts into September and subsequently tightening global supply.
Analysts at Goldman Sachs (NYSE:GS) forecast that global oil demand is nearing record levels driven by increased Chinese demand alongside production cuts from Russia and Saudi Arabia.
Further bolstering confidence in the loonie currency was news from Canada’s West Coast where dock workers and their employers announced they had reached a new labor agreement, thereby averting an imminent strike threat that had disrupted operations at some of Canada's busiest ports.
Analysts at Scotiabank (TSX:BNS) note that some of the CAD's rally today may be due to "USD selling (versus the CAD and other major currencies) from passive hedge rebalancing Monday, although these sorts of flows have tended to slide into the market in the days leading up to month-end in recent years (rather than right around the turn of the month).
Looking ahead for the pair, they note that "While spot trends are static, the strengthening spread correlation does suggest that the economic data and their impact on the outlook for monetary policy in the US and Canada should be the primary driver for spot (rather than risk appetite or commodities) in the near term."
On a technical level for the pair, analysts at FX Street note that "The USD/CAD has a bearish outlook for the short term, per the daily chart. The Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) hint at a strong bearish momentum."
"Furthermore, the pair is below the 20,100 and 200-day Simple Moving Averages (SMAs), implying that the bears retain control on a broader scale."FX Street analysts recommend support levels at 1.3150, 1.3120, 1.3100, while resistance is at 1.3215 (20-day SMA), 1.3250, 1.3270.