In the third quarter, the Canadian dollar is set to rise against the US dollar, driven by a combination of factors such as improving risk appetite, resilient global growth, rising commodity prices, and hopes of additional stimulus from China. These developments have set the stage for a bullish outlook on the Canadian dollar, with potential gains against its US counterpart.

The Canadian dollar’s ascent against the US dollar can be attributed to the improvement in risk appetite across global markets. As stress in the banking and financial sectors begins to ease, investors have gained confidence in risk-sensitive assets, with technology stocks being a prominent choice. The diminishing concerns surrounding the stability of the financial system have provided a supportive environment for the Canadian dollar’s strength.

The optimistic outlook on global growth has played a crucial role in bolstering investor sentiment and favoring the Canadian dollar. The expectation of peaking interest rates has added to the positive sentiment, as it indicates a potential period of stable monetary policy. This combination of factors has attracted investors to riskier assets, and the Canadian dollar has been among the beneficiaries of this trend.

Canadian Dollar is Set to Rise Due to Improving Risk Sentiment and China’s Stimul Boost

Another influential factor behind the Canadian dollar’s strength is the rebound in commodity prices. The Bloomberg Commodity Total Return Index experienced a notable recovery during the week ending June 16, indicating an upward trajectory for commodities. The stabilization of the Bloomberg Industrial Metals index further supports the notion that commodity prices have reached a solid floor. Given that the Canadian economy is heavily dependent on commodity exports, particularly oil and metals, the increase in commodity prices has had a positive impact on the Canadian dollar’s performance, alongside other commodity-sensitive currencies such as the Australian dollar and the New Zealand dollar.

Overall, the improving risk appetite in global markets, driven by easing stress in the banking sector and the growing confidence in risk-sensitive assets, combined with the rebound in commodity prices, has provided a solid foundation for the Canadian dollar’s rise against the US dollar. As investors continue to seek higher-yielding opportunities and global growth remains resilient, the Canadian dollar is likely to maintain its strength, attracting the attention of traders and investors looking for potential opportunities in the currency markets.

China’s recent policy actions have also contributed to the positive outlook for the Canadian dollar. As global central banks approach an inflection point in their tightening cycles, China has taken measures to stimulate its economy. The country has cut key policy rates, raising hopes of further stimulus in the coming months. Reports suggest that Beijing is considering issuing approximately one trillion yuan of special treasury bonds to support indebted local governments and boost business confidence. Such stimulus measures are expected to have a positive impact on global growth and, consequently, on commodity prices, benefiting the Canadian dollar.

The potential unwinding of stretched speculative short Canadian dollar positions presents an interesting dynamic in the currency markets. While both the US Federal Reserve and the Bank of Canada continue their tightening policies, market participants who have bet against the Canadian dollar may reconsider their positions. This reassessment could occur particularly if global growth remains stable and does not exhibit a significant downturn.

The unwinding of speculative short positions in the Canadian dollar could be driven by a reassessment of the currency’s underlying fundamentals. If economic data continues to show resilience and the Canadian economy demonstrates its ability to withstand external pressures, investors may view the Canadian dollar as an attractive investment option. As a result, market participants who had previously positioned themselves for a depreciating Canadian dollar may exit their positions, leading to a potential surge in demand for the currency.

Furthermore, any unwinding of speculative positions can amplify the Canadian dollar’s upward momentum. As these positions are closed out, the buying pressure on the Canadian dollar may intensify, pushing its value higher against the US dollar. This scenario would further strengthen the positive outlook for the Canadian dollar in the third quarter, with the potential for extended gains if market sentiment remains favorable and economic conditions continue to support the currency.

USD/CAD’s recent decline below crucial support levels around 1.3220-1.3320 indicates a shift in trend from sideways to bearish. This break below support has opened the gates for a potential decline towards the psychological level of 1.3000, with further downside potential towards the August low of 1.2725. Technical analysts have identified these price objectives based on the daily chart, supporting the bearish outlook for USD/CAD.

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In the GBP/CAD currency pair, the rally that lasted for nine months is showing signs of fatigue. The failure to decisively surpass the end-2022 high of 1.6850, which is slightly above major resistance on the 200-week moving average, suggests a limited upside for GBP/CAD. Currently, the cross is finding support near a crucial converged floor, including the April low of 1.6535, coinciding with the 89-period moving average. The bias for GBP/CAD remains tilted to the downside, potentially targeting the 200-day moving average at around 1.6300.

Conclusion

As we enter the third quarter, the Canadian dollar is poised to strengthen against the US dollar. Factors such as improving risk appetite, rising commodity prices, resilient global growth, and expectations of additional stimulus from China contribute to the positive outlook for the Canadian dollar. Traders and investors should keep a close eye on these developments and monitor key support and resistance levels as they navigate the USD/CAD and GBP/CAD currency pairs in the coming months.

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