By Ketki Saxena
Invsting.com – The Canadian dollar gained against its US counterpart today, enabling the loonie to eke out a gain for the month of April. Despite strength in the US dollar, supported by today’s US PCE data - and as investors prepare for a rate hike from the Federal Reserve, the Canadian dollar rallied on the back of positive sentiment in equities and an uptick in crude prices.
Meanwhile, Canadian GDP data put little damper on the loonie, eking out a gain in February, up 0.1% from January. However, a flash estimate for March shows a contraction of 0.1% - which analysts note may force the Bank of Canada to stay on pause rather than hike rates again. However, this is a scenario that has long been priced into markets since the BoC went on pause in March.
However, the risk-sensitive loonie was boosted by a firm uptick in sentiment, as a possible solution for the First Republic crisis comes into play, with the FDIC), the Treasury Department and the Federal Reserve beginning to meet with financial companies to seek a solution.
Inklings of trade turning risk on also helped support equities and crude prices, both of which are closely linked to the Canadian dollar.
Analysts at Scotiabank (TSX:BNS) note, “Our correlation matrix highlights strengthening, positive correlations between the CAD and (weak) domestic terms of trade amid soft commodity prices. The CAD’s correlation with US equity markets has strengthened again as well.”
On a technical level for the pair, analysts at FX Street note that “The price dipped to 1.3550, just below the low of the swing area, but only saw a slight pause so far. Nevertheless, if the level holds, traders will eye the 50% midpoint of the range since the March high at 1.35808 as an upper resistance target. Get above that level and buyers can breathe a sigh of relief.”
““On the other hand, a drop below 1.3553 with momentum would pave the way for further declines, with the 100-day moving average at 1.35261 as the next significant target. Earlier this week - on Monday and into Tuesday - the price found support near the 100-day moving average level before ultimately breaking higher.”
Looking ahead for the pair on a fundamental level, analysts at Scotiabank note, “CAD prospects remain challenging but a continuation of the wide, choppy range in place for the past few months seems likely… On the other [hand], our fair value estimate suggests the CAD is undervalued relative to our equilibrium estimate—and by quite a significant margin.”