Image © Adobe Stock

A shift in commodity market dynamics and "less pessimistic" sentiment amongst key investors leads analysts at Macro Hive to say the Canadian Dollar's prospects are turning more constructive.

The independent research provider says in a new research commentary that hedge funds are turning less pessimistic on the Canadian dollar while asset managers have turned bullish.

The sentiment switch comes in line with higher oil prices and Canadian equity outperformance.

Oil prices have rallied over the course of July amidst growing demand linked to improved expectations for the outlook of the global economy.

With recession fears fading in the U.S. and other major economies, demand for oil has increased, in turn boosting the value of one of Canada's most important foreign exchange earners.

"The broad path for global commodities will prove critical for the Canadian dollar's trajectory in coming months," says Macro Hive founder Bilal Hafeez.

"The Canadian dollar is up 3.5% (vs USD) over the past three months, second only to the Norwegian krone. Oil prices are partly the cause. Brent crude escaped its $72-77/bbl range and headed back towards $85/bbl. This benefited the currencies of both oil-exporting nations," he adds.

On the domestic front, the Bank of Canada has raised interest rates at its last two meetings, taking Canada's overnight cash rate to 5%.

"As a result, investors pushed the Canadian dollar higher and outside its seven-month range," says Hafeez. "Higher oil prices and tighter Canadian monetary policy have forced investors to adjust their previously bearish positions."

Above: Leveraged funds pare CAD shorts: Macro Hive.

Macro Hive cites data showing hedge funds have scaled back Canadian dollar net-shorts from 49.1k contracts a month ago to 11.1k, making for the largest adjustment in G10 FX over the period.

Asset managers have meanwhile turned net-long on the Canadian dollar for the first time since early November.

"We are cautiously optimistic on the Canadian dollar," says Hafeez. "Global economic data is holding up, supporting commodity prices, while Chinese industrial demand appears to be encouraging oil prices even higher. Simultaneously, Canadian equities are outperforming as strong U.S. equity performance tires."