By Ketki Saxena
Investing.com – The Canadian dollar rallied to a six week high against its US counterpart today, with the commodity linked Canadian currency receiving a substantial boost from a 6.5% jump in oil prices following a surprise OPEC+ production cut.
OPEC+ announced that it will cut its production target by a further 1.16 million barrels per day, contrary to expectations that the bloc would stick with its prior decision to cut target output of 2 million bpd until December.
The total volume of cuts by OPEC+ now stands at 3.66 million bpd, equating to 3.7% of global demand.
The US dollar meanwhile declined against a basket of currencies as treasury yields retreated following weak ISM manufacturing economic data, that has investors upping bets of an early pause from the US Federal Reserve.
Expectations for a pause from the Federal Reserve have been growing following the recent banking crisis, as well as economic data such as Friday’s lower than expected PCE.
Meanwhile, robust Canadian economic data, such as Friday’s much higher than expected January GDP growth and today’s Survey of Business and Consumer expectations has investors rethinking the “conditional pause” from the Bank of Canada.
The divergence between BoC and Fed policy is also serving as a tailwind for the risk-sensitive loonie, as is upbeat investor sentiment.
Analysts at Scotiabank (TSX:BNS) also highlight three fundamental reasons the CAD Is likely to strengthen further, noting that “the CAD looks cheap relative to its equilibrium estimate. Its undervaluation has reached relatively extreme levels (more than one standard deviation).”
“A second factor is that seasonality is poised to turn more supportive for the CAD. April is the best month of the year for the CAD against the USD (which has weakened 75% of the time in April over the past 20 years). The USD returns an average of a little more than –1% in April since 2002.”
“A third factor supporting CAD gains is positioning. Last week’s CFTC report showed a sudden rush amongst speculative, leveraged and real money investors to load up on CAD shorts…. the biggest bearish bet on the CAD since 2008—a clear, contrarian signal that market sentiment had become too lop-sided.”
On a technical level for the pair, analysts at Talk Markets note, “ USD/CAD is on the verge of breaking below its bullish trend line after some key support levels including 1.3500 gave way. A clean break below the trend line would bring the 200-day average "into focus, at 1.3377, followed by the February low at 1.3266.
“Even if we see a bit of data-related bounce later in the week, the path of least resistance would remain to the downside for as long as key resistance in the shaded region on the chart, around 13550 to 1.3650, remains intact.”