USD/CAD: Loonie Gains; CAD Short Covering to Further Strenghten Loonie

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By Ketki Saxena

Investing.com – The Canadian Dollar extended gains against its US Dollar for the third consecutive day, supported by continued risk-on sentiment and optimism around crude prices as banking fears receded.

Crude prices ticked lower on the day as investors pocketed profits, but have staged a significant comeback from last week’s brutal, bank inspired selloff. Supporting the prospect for crude oil however, supply worries remain at the forefront following lower than expected US inventories, larger than expected gasoline draws, and a halt to some exports from Iraq’s Kurdistan region.

A speech from Bank of Canada Deputy Governor Toni Gravelle had little effect on the pair, with Gravelle adding little in the way of monetary policy commentary, although he noted that the BoC’s Quantitative Tightening program would run its course by the first half of 2025.

The US dollar meanwhile pared back some losses against a basket of major currencies, but remained pressured on expectations for a less hawkish Fed.

On a technical level, analysts at FX Street note, “USD/CAD remains downward biased after dropping below the 50-day Exponential Moving Average (EMA) at 1.3594. a drop below 1.3550 will expose the 100-day EMA at 1.3520, ahead of testing 1.3500. Once cleared, a support trendline at around 1.3420/30 could be tested before retracing to 1.3400.”

“On the other hand, the USD/CAD buyers reclaiming the 50-day EMA at 1.3594 could pave the way to test 1.3600, followed by the 20-day EMA.”

Analysts at Scotiabank (TSX:BNS) also make an interesting point regarding added pressure on CAD short positioning that accumulated when investors bet on the USD in the context of the Bank of Canada remaining on the sideline while the US Federal Reserve pushed ahead with further rate hike.

Since the materialization of the banking crisis, however, has seen Fed expectations pare back considerably, with investors now hoping the Fed will pause or even pivot at its next meeting.

The Scotiabank analyst note, “The widening out of interest rate spreads that some had perhaps expected a couple of weeks ago looks less likely to emerge now and that will likely add to pressure on short positions to cover and drive a bit more CAD strength.”