By Ketki Saxena
Investing.com – The Canadian dollar clawed back Friday’s losses against its US counterpart today, with the USD/CAD seeing its biggest drop in two weeks today as risk-on sentiment rebounded and crude prices jumped.
The sharp uptick in investor sentiment - reflecting in equities and riskier assets like crude, equities, and the Canadian currency - was driven by hopes of easing stress in banking as US based First Citizens Bank announced a deal to acquire the loans and deposits of the beleaguered Silicon Valley Bank.
In addition to an allayment of Banking fears, the risk-sensitive Canadian currency is also being boosted vs the USD by investor expectations for a Fed pause in rate hikes at the May FOMC meeting,and a rate cut as early as June.
Keep in mind this is in marked contrast to comments from Fed policymakers including Fed Chair Jerome Powell, who says more rate hikes remain on the table. Furthermore, the Summary of Economic Projections (SEP) release last week shows FOMC members expect rates to remain around 5.0% for the rest of 2023.
The commodity-linked loonie was also supported by gains in crude, supported by optimism that banking sector issues would be contained and a global recession staved off.
Looking ahead however, analysts at MUFG Bank note that “We do not expect banking fears to blow over quickly and they pose downside risks to global growth through tightening credit conditions.”
“Risks remain titled to the downside for G10 commodity currencies in the near-term.”
The analysts do however acknowledge that it is “Premature to rule out a boost for commodity currencies later this year from a stronger than expected pick-up in demand from China.”
On a technical level, analysts at FX Street note “The USDCAD moved below the near converged 100/200 hour moving averages earlier today, and used those moving averages to lean against. The price has moved lower and now looks toward the next key target between 1.3650 and 1.3665.”
“On a move into that area, there could be support buyers with stops below 1.3650… On a break below there should be more momentum."