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Canadian dollar’s rally draws attention to key levels

The Canadian dollar is having a moment in the sun and it’s all the more remarkable since the commodity currency is shining as oil prices slide.

The loonie, which takes its nickname from the bird on its notes, has been on a tear after hawkish comments from policymakers, taking it to its strongest level against the dollar in four months. And it might yet have further to run.

“Near-record short positions in the Canadian dollar show that its strength has caught the market by surprise,” says Neil Mellor, senior currency strategist at BNY Mellon.

While support for the currency could come from traders moving to unwind short positions (bets that the Canadian dollar will weaken), Mr Mellor points out that further pressure on oil also poses a threat to its strength.

“Since the turn of the millennium, there has been a 90 per cent inverse, weekly correlation between Brent crude and the Canadian dollar, which makes its strength this week all the more impressive.

“Further falls in the price of oil could yet remind [investors] of the aforementioned strong correlation and the BOC could certainly demur over currency strength.”

Nonetheless, BNY Mellon warned in May of “further vigour” for the loonie if it broke through its 200-day moving average, often a sign that the current trend could accelerate. It was then at C$1.3300 to the dollar. It has now reached C$1.3265.

The retracement from last year’s lows to this year’s highs comes in at $1.3125. That, says Mr Mellor, is the next level to watch.

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